Bankers will start pre-marketing today of an initial public offering for Chow Tai Fook Jewellery — a deal that looks set to exceed Prada as the largest listing in Hong Kong so far this year. The decision to go ahead with the deal comes after the issuer toned down its valuation expectations to reflect the current market environment.
The company initially planned to raise up to $4 billion, but is now aiming for a slightly less ambitious size of about $3 billion. The reduction will come partly from a lower valuation, and partly because the company is now likely to sell only 10% of its share capital, one source said. The earlier plan was to sell about 16%. However, the final terms are supposedly still up for discussion as bankers get more feedback from investors during the pre-marketing, which is expected to last a couple of weeks.
Even at the smaller size, the offering will pose a real test for the Hong Kong market, which has seen only six new listings above $100 million since the beginning of September, the largest of which was Citic Securities’ $1.7 billion offering. A number of companies have also called off or postponed their listing plans after failing to get enough investor interest. And perhaps more importantly, investors have had a tough time this year as all but a handful of the Hong Kong listings of size are still trading below their IPO price and may be wary about increasing their exposure to untested names even further this close to year end.
However, Chow Tai Fook’s strong brand, together with its rapid growth in China, should help attract investors to the deal. The company is currently wholly owned by The Chow Tai Fook Group, which is controlled by Hong Kong tycoon and New World Development chairman Cheng Yu Tung. The company specialises in gold and diamonds and has more than 1,300 retail outlets spread across China, Hong Kong, Macau, Taiwan, Malaysia and Singapore. According to its website it is aiming to increase its number of stores to more than 2,000 by the end of 2016. Much of this expansion is expected to take place in mainland China.
Chow Tai Fook Jewellery’s global branding director, Alan Chan, told participants at the Reuters Global Luxury Summit in Hong Kong in May that the company aims to open 200 new stores every year, of which 90% will be located in China.
The early response from investors is said to have been positive and if the deal is offered at a reasonable valuation, it should do okay, bankers on and off the deal believe. Indications that the company was seeking a valuation of as high as 30 times next year’s earnings had thrown some doubt over whether the IPO would be possible in the current market conditions — Prada’s $2.5 billion IPO was priced at 23 times the earnings projection for the fiscal year to January 2012 and the stock has fallen 6.1% since — but with a more modest valuation there should be enough buyers, they say. Given the large size and the continued volatility in global markets, people won’t be buying it with expectations of strong gains on day one, but as a long-term investment it should work.
In a report issued in April this year, BOC International noted that average spending on jewellery in China is still low and projected that it will increase at a compound annual growth rate of 25% between 2010 and 2013,
As has been the case with most of the successful IPOs in the past couple of months, Chow Tai Fook will be seeking to line up a combination of cornerstones and anchor investors before launch to create more certainty that the deal will get done, and make other investors more comfortable to commit.
It is unclear why Chow Tai Fook is so eager to get the deal out the door this year, especially since the initial expectations were that it wouldn’t come until early 2012. The Hang Seng Index has rebounded 17.8% from its 2011 low of 16,250 points on October 4, but is still down 16.9% year-to-date. On Thursday last week the index tumbled 5.25% as markets were spooked by more bad news out of Europe.
However, the company may want to take advantage of the fact that most of the billion dollar plus IPOs that were planned to hit the Hong Kong market in the fourth quarter, are unlikely to materialise, thus reducing the competition for investors. Also, there is no certainty that the appetite for primary deals will be any better next year and if the company is bearish about the outlook for next year, it could make sense to give it go now. That said, if the management doesn’t feel it is getting a fair valuation, it may still decide to wait.
Chow Tai Fook Jewellery Co was founded in Guangzhou in 1929 by Chow Chi Yuen, the father-in-law of Cheng Yu Tung. It opened its first store in Hong Kong in 1946, has an estimated and annual sales of more than HK$30 billion ($3.85 billion), according to an earlier entry on its website. This makes it one of the largest jewellery brands in Hong Kong and mainland China. Aside from the stores, the company also owns two diamond-cutting facilities in South Africa and one in China. Its jewellery design and manufacturing plants in China and Hong Kong produce more than 7 million pieces of jewellery every year.
Deutsche Bank, Goldman Sachs, HSBC and J.P. Morgan are global coordinators for the offering, while Citi, Credit Suisse and UBS are joining them as joint bookrunners.
Other big deals that could possibly hit the market in the next few weeks include New China Life Insurance, which is looking to raise between $3 billion and $4 billion from a dual listing in Hong Kong and Shanghai. The insurer was expected to appear in front of the Hong Kong listing committee more than two weeks ago, but was forced to postpone the hearing as it still hadn’t received all the relevant approvals from Chinese regulators. Those are now said to be largely in place and a new listing hearing has supposedly been scheduled for this Thursday.
There was also some talk last week that Noble Group might start investor education this week for the spin-off of its agricultural unit, but in light of the resignation of CEO Ricardo Leiman following a poor third-quarter earnings report on Wednesday, that seems unlikely to happen. Noble’s share price tumbled 26.5% on Thursday before finishing unchanged on Friday. Crucially, the agricultural business was also largely responsible for the company’s first quarterly loss in 12 years as rising cotton prices caused a number of US cotton producers to default, forcing Noble to buy expensive cotton in the spot market to honour its supply contracts.
Hence, this doesn’t seem the best of times to seek a separate listing for the business — even if Noble is very keen to release hidden value to help prop up its struggling share price. The company has mandated Citi, Goldman Sachs and J.P. Morgan to help arrange the spin-off.
