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Chow Tai Fook Jewellery is kicking off the institutional roadshow today for an initial public offering of between HK$15.75 billion and HK$22.05 billion ($2 billion to $2.83 billion). The deal size is below the company’s earlier target to raise as much as $4 billion, which is a reflection of the difficult market environment. However, if the demand proves to be robust, Chow Tai Fook will be able to upsize the deal by 20% and if you add a 15% greenshoe as well, the total proceeds could reach $3.9 billion at the top of the range.
This is the same structure that AIA Group used on its IPO in October last year. At the time there was a question mark over whether the pan-Asian insurance company’s aimed-for size may be too much for the market to absorb at the valuation on offer. In the end, AIA was able to exercise both the 20% upsize option and the greenshoe in full and also fixed the price at the top of the range for total deal size of $20.5 billion — a record for a Hong Kong IPO.
Chow Tai Fook’s IPO may look tiny in comparison, but it does still have the potential of becoming the largest listing in Hong Kong this year, ahead of Prada’s $2.5 billion offering. But as shown by the IPO of HKT Trust last week, raising more than $1 billion dollars is not an easy task for any company at the moment.
Indeed, the IPO comes in a declining market — the Hang Seng Index has lost 9.3% over the past nine sessions — and at a time when investors have very little risk appetite. New listings are particularly out of favour as all but a handful of Hong Kong IPOs of size this year are still trading below their issue price and to limit any further losses many funds have started to wind down their business for the year.
That isn’t stopping a number of issuers from trying to push out deals before the Christmas holidays, however. Among the listing hopefuls are New China Life Insurance, which is expected to start the bookbuilding for a dual listing in Hong Kong and Shanghai of about $2.3 billion tomorrow.
Even with that competition for funds, the expectation is that there will be a lot of interest for Chow Tai Fook, a jewellery retailer that is wholly owned by the Chow Tai Fook Group, which is controlled by Hong Kong tycoon and New World Development chairman Cheng Yu Tung. For one, the company will have a market capitalisation of at least HK$150 billion ($19.3 billion), suggesting that it will be included in some of the key regional indices quite quickly after the listing. And that means many funds will have to buy it.
The company has also lowered its valuation expectations significantly and is now offering its shares at 15 to 21 times the projected earnings for the fiscal year to March 2013. This compares with earlier talk of a valuation of 25 to 30 times. The shares will be offered at a price between HK$15 and HK$21 each.
Chow Tai Fook has not signed up any cornerstone investors before launch but, according to a source, there is significant anchor demand from eight to 10 institutional investors. These investors have supposedly agreed to buy at least $1 billion worth of shares. Anchor investors fill the same function as cornerstone investors at the bookbuilding stage in terms of helping to generate momentum, but they don’t have to commit to a lockup and don’t have to have their names printed in the prospectus.
On top of this, bankers are also expecting demand from private banking investors to be good as many of them already know the company well. Chow Tai Fook was established more than 80 years ago and is the largest jewellery retailer in Hong Kong and China in terms of market share. According to a survey conducted in China by private equity firm Bain about 12 months ago, it is one of the top three brands that Chinese consumers are most likely to buy alongside Tiffany and Cartier. Chow Tai Fook specialises in gold and diamonds and focuses on the so-called mass-luxury market. It has more than 1,500 retail outlets spread across China, Hong Kong, Macau, Taiwan, Malaysia and Singapore.
In the current market environment, issuers would do well not to take any demand for granted, however. HKT Trust, which was priced at a 9% forward yield, attracted very little interest from private banks, even though they typically like yield plays.
And while Chow Tai Fook is coming at a cheaper valuation than initially hoped for, the current valuation is still at a premium to its two Hong Kong-listed competitors — Luk Fook and Chow Sang Sang which trade at 9.9 times and 9.8 times respectively. Luk Fook has the same March year-end as Chow Tai Fook, while Chow Sang Sang’s price-to-earnings multiple refers to calendar 2012.
Chow Tai Fook is significantly bigger than Luk Fook and Chow Sang Sang in terms of market cap and also has close to twice the number of points of sales as the former and more than four times as many as Chow Sang Sang. However, coming from a smaller base the latter two are growing at a faster pace.
Looking at international brands, Tiffany trades at a 2012 price-to-earnings multiple of about 18 times. The US-listed company has a greater focus on diamonds and as a direct result of that its gross margin is significantly wider — 59% versus Chow Tai Fook’s 29% to 31%. However, Chow Tai Fook has a much bigger presence in China, particularly in tier-3 and tier-4 cities.
Prada, which became the first luxury consumer brand to list in Hong Kong earlier this year, priced its IPO at a January 2012 P/E multiple of 23 and is currently trading at 18.8 times.
Chow Tai Fook is offering 1.05 billion shares as part of the base deal, which account for 10.5% of its share capital. The upsize option comprises an additional 210 million shares and could increase the total offering size to 12.6% of the company. The greenshoe will be 15% of whatever number of shares the company sells before listing. If both the upsize option and the greenshoe are exercised in full, Chow Tai Fook will sell 1.449 billion shares, or 14.5% of the company.
The retail tranche will amount to 5% of the total offering initially, but could be increased to 20% in case of strong demand.
The upsize option and the greenshoe are both made up of secondary shares. Part of the proceeds from the base offering — HK$3.3 billion to be exact — will also end up with the parent company as it will go towards the payment of a pre-IPO dividend that has been declared by Chow Tai Fook.
The rest will be used to fund the company’s expansion. It has a target to open about 200 stores per year, which translates into about 18% growth for next year. In the past three years it has opened an average of 179 stores per year. About 90% of the new stores will be located in mainland China.
It is also expanding its diamond processing facility in Shunde in China in two phases. When the third phase begins operations in 2015, the company’s diamond cutting and polishing capacity will have increased by three times from its current levels. It is also planning to set up a new production facility in Sichuan to help reduce the inventory turnover days for its mass luxury products.
Chow Tai Fook Jewellery was founded in Guangzhou in 1929 by Chow Chi Yuen, the father-in-law of Cheng Yu Tung and opened its first store in Hong Kong in 1946. Its first China retail store opened in 2003. 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.
Syndicate analysts expect demand for jewellery in China to continue to grow, driven by the growth in the overall economy as well as rising personal income and domestic consumption. At $19 (based on data for 2009), China’s per-capita consumption of jewellery is also still very small compared to developed markets. The per-capita consumption in the US in the same year was $260 and in the European Union it was $214. Hong Kong had a per-capita jewellery consumption of $97.
The syndicate analysts also note that the gold price doesn’t have much impact on Chow Tai Fook’s earnings as the company hedges most of its exposure through gold loans and bullion forward contracts. Changes in the gold price are also passed on to its customers as the company sells its gold jewellery by weight at the spot price, plus a margin to cover the design and production costs.
The order books will be open until December 8 and the trading debut is scheduled for December 15. 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.
Meanwhile, sources say China Polymetallic Mining, a Chinese lead, zinc and silver miner, is aiming to start a roadshow for a $150 million to $250 million IPO today. It could be followed later this week by department store operator Charter Group, which is said to target an IPO of between $250 million and $350 million; BMW dealership Shanghai Baoxin Auto Sales & Service, which is seeking between $500 million and $800 million; and Shanghai-listed Haitong Securities, which is expected to raise up to $1.75 billion from a Hong Kong listing.
Baroque Japan, a Japanese retailer of women’s fashion that was hoping to raise up to $150 million, has decided to postpone its IPO until next year. CLSA and UBS were joint bookrunners for that offering.
