361 Degrees launches $280 million IPO

Chinese sportswear manufacturer and retailer, 361 Degrees International, will today launch an initial public offering targeting as much as HK$2.18 billion ($280 million). Once completed, this will be the largest listing of a sportswear company in Hong Kong since Pou Sheng International raised $322 million last summer.

The IPO consists of 500 million primary shares, representing 25% of the company. A price range of between HK$3.15 and HK$4.35 has been set, which will make the final deal size between HK$1.58 billion and HK$2.18 billion ($203 million to $280 million). A 15% greenshoe could bring another 75 million shares into the deal, which, if exercised, could increase the total proceeds to a maximum $320 million.

The company's name comes from the idea that while it is possible to turn a full circle, 361 goes just that little bit further, and the extra one degree is supposed to represent its love and enthusiasm for sport. Since its launch in 2003, the Fujian-based company has become China's third largest sportswear company in terms of retail outlets with 5,500 outlets across the country as of the end of 2008.

Its product range consists of functional sportswear aimed at the mass market. One of its main lines is running shoes, which it has promoted by sponsoring the Xiamen marathon. While it is currently looking to sponsor more marathons across China, the biggest event that it will soon be associated with is next year's Asian Games, which are to be held in Guangzhou.

The listing candidate is the fastest growing among China's domestic sportswear companies in terms of revenues. In the 2009 financial year, which will finish at the end of June, the company is expected to have revenues of Rmb553 million ($80.8 million), which is a huge leap from the Rmb179 million it generated in fiscal 2008. In 2010, revenues are expected to reach Rmb721 million.

With a number of Chinese sportswear companies already listed in Hong Kong, investors should be familiar with the sector. The main comparables to 361 Degrees are other companies that sell functional, as opposed to fashion, sportswear. An obvious choice is Li Ning Company, which currently trades at around 16 times its estimated earnings for 2010. This is a significant premium to the price-to-earnings ratio of 7.6 to 10.4 times for 2010 implied by 361's price range.

Companies that focus on making less functional, more fashionable, sportswear products are somewhat cheaper. China Dongxiang, which owns the rights to the Kappa brand in China, is trading at around 13 times its estimated 2010 earnings. 

Sportswear companies have performed well in recent months as investors have targeted companies with an exposure to Chinese consumption. Li Ning's share price, for example, has more than doubled since the beginning of March. But two sportswear companies that listed last summer have so far failed to reach their IPO price. Xtep International Holdings, which listed at HK$4.05 a share last May, is getting close and finished at HK$3.91 on Friday -- but it has taken more than a year to reach this level. Pou Sheng last traded at HK$1.17, 61% below its listing price of HK$3.05 set in June last year. In July last year, another sportswear company -- XDLong International -- pulled its IPO on the day it was supposed to price.

The money raised in the IPO will be used for three main purposes: to expand the company's production capacity in both footwear and apparel; to pay for branding exercises such as sponsorship; and to launch a range of products targeting children.

After a week of investor education, the management is expected to hit the road today. Pricing is scheduled for June 23 with the trading debut set for June 30. Bank of America-Merrill Lynch is the sole bookrunner on the IPO.

361 will go head-to-head with another IPO, which is also launching today: Bawang International. The Chinese shampoo-maker is hitting the market with an offering expected to raise between $200 million and $250 million. In some ways, Bawang is not dissimilar to 361 since they are both companies which hinge their success on increasing consumption in China. The main selling point for Bawang is that it already has a strong market position from which it could reap the benefits of an expected increase in shampoo usage in China. HSBC and Morgan Stanley are orchestrating the Bawang deal.