However, the shoe manufacturer and retailer also has another feature that is fast becoming the norm among Chinese retail plays - high valuations. True, they are not as high as some of the most popular investment objects like sportswear retailer Li Ning or department store operator Parkson Retail, but at around 30 times projected earnings, it is hard to argue that it is cheap.
Still, people close to the offering say feedback from the pre-marketing suggests investors are prepared to pay these kinds of multiples as there are still not enough large-sized retail companies around to meet the demand.
ôBelleÆs principal asset is its scale of business,ö one observer says. ôIt is going to be the largest consumer play by some margin. Li Ning is a $2 billion company, Prime Success is just about $1.25 billion or so. Even ParksonÆs market cap is below $4 billion, while Belle is going to have a valuation north of $5 billion. This gives it a big presence in the same way that CCB or ICBC attracted interest.ö
Indeed, the massive demand for the recent sizeable IPOs of property developer Country Garden and China Citic Bank show that investors remain extremely keen on stocks that offer exposure to ChinaÆs urbanisation theme and the increase in disposable income that is following in its wake.
Both these stocks were priced at the top end of the indicative ranges and at quite high valuations, but even so Country Garden has risen 29% since its trading debut on April 20. Citic Bank is up 11% from its listing on April 27.
Belle is offering 1.4 billion shares, or 17% of the company, at a price between HK$5.35 to HK$6.20 for a total deal size of up to HK$8.68 billion ($1.1 billion). The majority of the shares, or 83%, is primary paper sold by the company, while the remaining 17% consist of secondary shares sold by the chairman and the companyÆs two financial investors.
A unit of LVMH Group, which owns the Louis Vuitton brand, has agreed to buy about $30 million worth of shares in the IPO, which should help boost confidence among other investors û should that be needed.
One of the financial investors is a private equity unit of Morgan Stanley and the other one is the China-focused CDH Investments. The two funds will see their combined holdings fall to about 8% of the company (split equally between them) from 11.5% as a result of the IPO. Although they will be locked up for six months, the shares owned by the pair will count towards BelleÆs free-float, allowing the company to limit the total share sale to 17% of the issued share capital.
Morgan Stanley is also a joint bookrunner for the IPO together with Credit Suisse. China International Capital Corp. and DBS Asia Capital are acting as co-leads.
The deal has the usual structure with an initial 90/10 split between institutional and retail investors, a claw back that could se the retail trance increase to 50% in case of strong demand, and a 15% greenshoe that could boost total proceeds to HK$10 billion ($1.3 billion).
The price range values Belle at 27 to 32 times its 2007 earnings, based on consensus syndicate projections. This compares with 22.5 times for Prime Success and 25.7 times for Mirabell, which are two other shoe manufactures listed in Hong Kong. Singapore-listed Hongguo currently trades at a 2007 price-to-earnings multiple of 20.5 times.
Prime Success is the one that is attracting the most attention by potential investors, and not just because it is the one that is closest in size to Belle. Rather, it is in focus because of a quite spectacular collapse in its share price over the past couple of weeks following a disappointing earnings release that has reduced its P/E multiple from the high 30s just before the earnings. The company blamed higher production costs and tougher competition among shoe manufacturers for the deterioration, which led to a sharp narrowing in operating markings.
Sources say Prime SuccessÆ set-back is having no direct impact on the interest for BelleÆs IPO, although to some extent it may have helped investors to focus on the differences between the two. The most important one, they say, is the fact that Belle generates less than 4% of its revenues from original equipment manufacturing (OEM), i.e. the production of shoes for other brands, while Prime Success earns a quarter of its income from this type of manufacturing.
As investors are also disappointed about the earnings guidance given by the Prime Success management, the sell-off could also result in previous Prime Success investors switching into Belle to maintain their exposure to the sector.
Belle makes about 15 million pairs of shoes per year, but almost all of these are sold through its own 3,828 retail outlets (many of which are in department stores) in 150 cities across China. This vertically integrated model, which also incorporates design and marketing, gives the company good control over its supply chain and also enables it to pass on higher production or raw material costs to the end consumer.
The company also has a strong portfolio of eight brands of primarily ladies footwear, including six that it owns and two that it licenses. Among these are Belle, Staccato, Teenmix and Joy & Peace, which targets the mid- to high-end of the market.
These strong brands are a key reason why investors are glancing at the valuations of other high-end retailers, such as department store operator Parkson Retail, which is valued at a 2007 P/E of 46 times and Li Ning, which fetches a P/E of 40 times. For the moment though, the latter two are primarily used to set a ceiling for BelleÆs potential valuation.
Another thing that makes Belle stand out from its shoemaking peers is its acquisition in the middle of last year of a sportswear business that gave it the right to sell sportswear for Nike and Adidas in China. It is now the largest sportswear retailer in China for these two brands and it is also an authorised retailer for other brands like Li Ning, Reebok, Puma, Mizuno, Kappa and LeviÆs.
One source notes that the rapid growth seen over the past few years, due to the sportswear acquisition and the move into retailing, is unlikely to be sustained as the company now plans to focus more on organic growth. However, he argues that a net profit compound annual growth rate of 30% to 35% should be achievable going forward.
Among the potential concerns, analysts say, are the short licensing period for most of its sportswear brands which exposed the company to renewal risks. The Nike and Adidas agreements both expire in 2008 and last year the licensing of brands and sports brands accounted for 28.7% of BelleÆs total revenue.
Higher taxes are another issue to be aware of as the company paid an effective tax rate of only 2.7% last year.
The Hong Kong retail offer will launch on May 9 and the final price is expected after the US close on May 15. The shares are due to start trading on May 23.
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