Bawang launches $215 million IPO

Bawang International, the company behind China's fourth most popular shampoo brand, yesterday launched an IPO that is expected to raise up to HK$1.67 billion ($215 million). The company started its roadshow at the same time as 361 Degrees International, another China consumption play that is also expected to price next week.
 
Bawang's IPO consists of 700 million primary shares, or 25% of the company, which are offered at a price between HK$1.95 and HK$2.38 apiece. This gives a total deal size of between HK$1.37 billion and HK$1.67 billion. A standard 15% greenshoe applies, which, if exercised, will inject another 105 million shares into the IPO, increasing the maximum size of the deal to $247 million.
 
The price range values the company, on a pre-shoe basis, at between 14.3 and 17.5 times its estimated 2009 earnings, according to joint bookrunner numbers. On a post-shoe basis, the valuation increases to between 14.8 and 18.1 times 2009 earnings, based on joint bookrunner numbers.
 
This makes Bawang somewhat cheaper than its comparables. Since there are no other shampoo manufacturers listed in Hong Kong, investors are looking at companies that make similar products, or other asset light distributors of branded products. In the first category, the most obvious candidate is Hengan International, China's leading personal hygiene company, which is trading at around 22 times 2009 estimated earnings. In the second category, there is sportswear company Li Ning, which is trading at around 20 times 2009 estimated earnings.
 
Bawang is positioned in a market dominated by foreign brands. Proctor and Gamble (P&G) has a 39% share of China's shampoo sales, much more than Bawang's 7.6%. Within the niche herbal shampoo sector though, Bawang comes out top with a 36% market share.
 
"The shampoo market will continue to grow steadily... even under a relatively unfavourable economic downturn, as a result of its necessity nature," said Michelle Huang, a Shanghai-based senior analyst at consultancy Euromonitor International.
 
Huang said that continued growth in shampoo usage is driven by a range of factors. One such factor is product innovation: Bawang's competitors, even the leading players, are developing herbal products. This year, for example, P&G started a line of herbal products under its Rejoice brand. Another major factor is the male market segment, since men have contributed more to the recent increase in shampoo usage than women.
 
As a company that already has an established herbal product aimed at men, Bawang looks well set to take advantage of the growth trends.
 
More generally, the latest data on Chinese consumption are promising. In May, retail sales were up 15.2% year-on-year, compared to 14.8% in April. The clothing, furniture, cosmetics and car sectors all reported sales growth above 20%.
 
"We believe that the further growth in May was due to the contribution of the Dragon Boat Festival," said a research note released yesterday by Chinese brokerage, Guotai Junan. "On the other hand, the sales might reflect that the market is recovering. In May, department stores under our coverage all achieved stronger growth. We remain positive on retail sales growth in the long run."
 
Bawang is going head-to-head with another company that has a future based in Chinese consumption, 361 Degrees. The sportswear company is looking to raise up to $280 million pre-shoe and has an almost identical timetable -- it also started formal marketing yesterday, but is set to price a few days earlier than Bawang, on June 23. The shampoo company is scheduled to price on June 26.
 
Both companies held investor lunches in Hong Kong yesterday. To ensure investor attendance, 361 enlisted the help of some local models. But despite the sexy competition, the Bawang lunch was also said to have been well attended.
 
HSBC and Morgan Stanley are joint bookrunners for the Bawang IPO. Bank of America-Merrill Lynch is the sole bookrunner of 361.