Given the strong growth expectations for Chinese consumer spending in general, and the branded sportswear market in particular, it was no surprise that the deal attracted strong demand from both institutional and retail investors. Especially since the bookbuild also coincided with a sharp run-up in the secondary market. As of the close of trading Tuesday, which was the final day of order taking for Dongxiang, the Hang Seng Index was up 45% from its lows on August 17.
The market took a sudden downward turn yesterday, losing almost 1,400 points from its intra-day high and closing more than 700 points below TuesdayÆs record high, but this happened too late to have any impact on the sentiment for Dongxiang.
Aside from these ôexternalö influences, sources say a key reason why investors flocked to the deal was the power of the Kappa brand. This appears to be true with regard to retail investors in particular, with initial indications suggesting that this deal attracted more retail demand than Bosideng International, which is another China consumption play that was in the market at the same time.
Bosideng is ChinaÆs leading down jacket designer with a 36% market share, but some observers say it has less of a brand image than Kappa, which ranks as ChinaÆs third largest international sportswear brand behind Nike and Adidas.
Sources say the subscription rate for DongxiangÆs 10% retail tranche was well above the 100 times that was needed to trigger the maximum clawback that will boost the size of this tranche to 50% of the total offering. One person close to the deal say it attracted about HK$67 billion ($8.6 billion) worth of retail cash, which would correspond to a coverage ratio of more than 120 times.
If true, this isnÆt as much as some of the other consumer stocks that have come to market this year, but taking into account the strong competition for funds, with six other IPOs of size in the market at the same time, it looks quite strong.
ôWith so many other deals in the market there wasnÆt much margin financing available so a lot of the retail demand is outright demand,ö says one source. He adds that being accepted by retail investors is much more important for a branded company than for any other type of issuer as it serves as an indication of the popularity of the brand.
Aside from BosidengÆs IPO, which closed yesterday and was due to fix the price in the early hours of this morning Hong Kong time, DongxiangÆs retail offering also overlapped to some extent with the retail offerings of Xinjiang Xinxin Mining Industry, property developers Soho China and China Aoyuan Property Group, online gaming provider Kingsoft and chicken meat producer and processor DaChan Food. Together, these seven companies are seeking to raise about $4.4 billion.
By comparison, branded shoe manufacturer and retailer Belle International, which attracted more than $55 billion worth of retail cash for its $1.1. billion offering to become the most popular Hong Kong IPO ever among retail investors, competed with only one other listing candidate for funds when it came to market in May. And that company was a mid-sized fabric manufacturer û Pacific Textiles û which raised only $245 million.
Sources say BosidengÆs up to $836 million deal appears to have been slightly less well covered on the retail side since as of yesterday there were still a question mark whether the full clawback will be triggered or whether it will stop at 40% - indicating that the retail tranche may have been less than 100 times covered.
Both Bosideng and Dongxiang attracted strong interest from institutional investors, however.
DongxiangÆs institutional tranche - after adjusting for the clawback and deducting $80 million of shares that were set aside for cornerstone investors - the remaining institutional tranche was said to have been just over 110 times covered. Well over 500 investors participated with traditional long-only funds taking the majority of the deal. The hit-rate from the one-on-one meetings was said to be close to 100%.
In addition to the momentum buying that has been heavy in the most recent IPOs amid the sharp rally in the secondary market, the deal also attracted buying for fundamental reasons and the deal was widely regarded as being cheap relative to other branded retail companies such as Belle or sportswear retailers Anta and Li Ning.
The final price valued Dongxiang at 24 times its 2008 earnings, which compares with 30 times for Anta, 38 times for Belle and 42 times for Li Ning, all according to Bloomberg data. Li Ning and Anta were both largely unchanged during the course of DongxiangÆs roadshow, while Belle rallied 24.5% in line with the rest of the Hong Kong market.
Benefitting from a forecast 23% compound annual growth rate of ChinaÆs sports wear market in 2006-2009, Dongxiang is expected to double its net profit this year to Rmb623 million from Rmb306 million in 2006.The growth is expected to slow to about 21% in 2008.
Dongxiang, which was brought to market by Deutsche Bank and Merrill Lynch, sold 1.375 billion shares, of which 86% were new. The remaining 14% were sold by two units of Morgan Stanley, which were pre-IPO investors in the company. The two units will see their combined stake fall to 12.2% after the listing from 20% just before. The offering accounted for 25% of the enlarged share capital, although this could increase to 27.9% if the greenshoe is exercised in full. If so, the total deal size will also increase to $807 million.
The 15% greenshoe will have the same 86/14 split between new and old shares.
The stock is scheduled to start trading on October 10.
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