Cuckoo Electronics, Korea's best selling domestic rice cooker manufacturer, has launched a W196 billion - W254.9 billion ($190 million - $247 million) IPO via Woori Investment & Securities. Institutional book building for the 2.45 million share deal runs from July 23 - 24, with results published on July 28 and listing scheduled for August 7.
There is no separate international tranche for the deal, with foreign investors charged a 1% participation fee to take part in the domestic institutional tranche, which accounts for 60% of the deal. Retail investors will account for a further 20% and Cuckoo employees the remaining 20% according to a term sheet seen by FinanceAsia.
The company is offering 25% of its enlarged share capital through a largely secondary share sale. Affiliate Entop is selling its entire 9.54% holding, while the founder's brother is halving his stake to 15%.
Founder and Chairman, Ja Shin Koo and his son and CEO, Bon Hak Koo, will retain their entire 42.4% stake. They will also be subject to a six-month lock-up.
Valuation
The deal is being offered on a range of W80,000 to W104,000 per share, equating to 10.2 to 13.2 times estimated 2014 earnings.
At the mid point of the range, this represents a 35.8% discount to Woori analysts’ fair value estimate of 15.9 times 2014 earnings. The stock is also being pitched at a big discount to both the Kospi and much smaller domestic comparables such as LiHOM-CUCHEN, PNPoongnyun and Coway.
The Kospi is pretty much flat on the year and is currently trading around 16.3 times 2014 earnings. However, small consumer stocks such as LiHOM-CUCHEN and PNPoongnyun have had a very steep run up year-to-date and investors will be concerned about how much upside remains.
LiHOM-CUCHEN, which also makes rice cookers and crystal products, is up 154% through to July 21, although it has been showing signs of softening over the past week. It is currently trading at 22.8 times 2014 earnings.
PNPoongnyun, which makes rice cookers and other kitchenware, is up 330% year-to-date, with most of the rise occurring since mid-May. It is now trading at 27 times 2014 earnings.
Both LiHOM-CUCHEN and PNPoongnyun are smaller than Cuckoo Electronics, which has a leading 73% market share of domestic rice cooker sales. LiHOM-CUCHEN reported a 2013 net profit of W17.9 billion, while PNPoongnyun reported a net profit of W9.86 billion, compared to Cuckoo Electronics’ W57.44 billion.
The third related domestic comparable is Coway, which manufactures water purifiers and is much larger than Cuckoo Electronics, reporting a 2013 net profit of W245 billion. Year-to-date, the stock is up 39.9% to trade at 24.2 times 2014 earnings.
Cuckoo Electronics’ water purifier rental business accounted for 15.5% of 2013 sales and is growing at a CAGR of 5.2%. But rice cookers made up a dominant 80% of the W508.8 billion in overall sales.
Earnings drivers
The company sees future growth coming from two main areas – exports and consumers upgrading to IH (induction heating) rice cookers, which heat all the surfaces of the inner pot so every grain of rice is cooked thoroughly. It expects the latter to account for 55% of Korean sales in 2014.
Exports currently account for only 10% of overall sales, but have risen from 6% in 2011. The company exports to 30 different countries and recently opened its first branded shop in Vietnam.
However, a key future earnings driver will be China where less than 5% of the population has an IH style rice cooker and the company sells its Cuckoo branded cookers through 800 shops. In a conference call to investors, Cuckoo Electronics’ management also flagged the buying power of Chinese tourists in Korean duty free shops (DFS).
The number of Chinese tourists visiting Korea has quadrupled in the past four years and stood at 4.05 million in 2013. Likewise, Cuckoo Electronics saw its DFS sales rise 116% in 2013, to account for 4% of global sales.
The company says it has re-designed some of its product lines to appeal to Chinese consumers, adding gold and red branding. It also has a factory in Qingdao, which turns out cookers for sale on the Mainland.
Its other three factories are located on the Korean peninsula, two in South Korea and one in the North, which produces lower-end thermal rice cookers.
Recent IPO’s from Korea have all popped since listing, with TRUWIN up 38.5% since its July 11 debut and Ajinextek up 22.7% since June 23.
