Books have opened for lady wear retailer Koradior Holdings, the latest Chinese company seeking to list in Hong Kong amid a recent spurt of deal activity.
Koradior aims to float 125 million shares, or 25% of its enlarged share capital pre-greenshoe, and raise up to HK$564 million (US$73 million) by pricing the shares between HK$3.05 and HK$4.51 a unit under the lead of CIMB and Haitong. If the greenshoe option is exercised, the company could raise HK$648 million.
The Shenzhen-based company is being marketed at 2014 forward earnings of eight to 13 times, cheaper than peer Cosmo Lady, the Chinese lingerie maker that also began its roadshow this week and hopes to raise $232 million in an IPO on Friday.
In addition to being marketed at lower p/e ratios than its comparables, bankers told FinanceAsia that Koradior’s growth estimates may appeal to investors, particularly the retail tranche in Hong Kong — the company’s revenues are forecast to grow by 30% next year, which puts its 2015 p/e between 6 and 10.6 times with a market cap of $291 million.
“Investors like it. It’s smaller [than Cosmo Lady] but it’s cheaper,” one banker said. “It had a strong start on day one and [the institutional tranche] is basically covered.” The retail portion is not yet covered, although he noted that books remain open until midday on Friday.
Given the size of the deal, there will not be a cornerstone, which will ensure the free float remains as large as possible, the banker added.
Comparables
In addition to Cosmo Lady — which has a market cap of between $820 million and $1.1 billion — one of Koradior’s main comparables is Belle International, a Chinese footwear and sports retailer currently trading at 12.4 times expected 2015 earnings.
Belle’s recent performance may put investors off the sector — Belle’s shares are down 9% so far this year and have dropped 17% since peaking at HK$9.90 on February 27. “It’s not everyone’s favourite stock right now,” the banker said.
But interest in Belle was tremendous at the time of its IPO in 2007. The company raised $1.1 billion after pricing 1.4 billion shares at HK$6.20 a unit, the top of the initial price range, and had strong aftermarket performance. It rose 42% in its trading debut.
On a relative value basis, China Lilang may be a closer comparable to Koradior. The Fujian province-based company, which manufacturers men’s clothing and accessories, is currently trading at 9 times 2014 earnings and is up 6% so far this year. During its bookbuild in 2009, the company was being marketed between 9.5 and 11.8 times its projected 2010 earnings, in line with Koradior.
Day one investors in China Lilang would have returned 30% since the company floated its shares four years ago.
Cosmo Lady, which is more expensive than Koradior on a 2014 p/e basis, has not put investors off. The institutional book is already three times covered, although most of this demand has come in at the bottom of the HK$3.27 to HK$4.42 per unit range. As such, it’s questionable whether either Cosmo Lady or Koradior will generate the same interest as Belle.
Financials
Koradior, which manufactures high-end ladies’ wear, is a classic Chinese consumption story. The per capita urban household annual disposable income for Chinese households is expected to hit Rmb43,815 ($7,032) by 2018, a 63% increase from Rmb26,955 in 2013, according to Frost & Sullivan.
More disposable income means the Chinese will spend more on clothes, particularly branded lifestyle products, a trend that should benefit Koradior, which ranked sixth in 2013 for total revenue within the high-end segment in China.
Revenues and profits have steadily improved in the past three years. Revenues totalled Rmb701.9 million in 2013, a 45% increase from Rmb484.9 million in 2012 and a 115% jump from Rmb327.1 million in 2011. These growth numbers represent a compound annual growth rate of 46% during the time period.
Net profit was Rmb80.1 million in 2013, a 188% rise from Rmb27.8 million in 2012 and more than 300% higher than Rmb19.4 million in 2011.
Still, the company’s ability to differentiate itself is becoming difficult. The ladies’ fashion wear market in China is highly competitive. And this trend will continue as the number of domestic and international fashion companies in the mainland rises. This increasing competition could hurt revenue and growth.
Proceeds
As of December 31, 2013, the company had 254 retail stores in Beijing, Shanghai, Guangzho, Shenzhen, Chengdu, Xi’an and Chongqing, 237 of which were operated directly by Koradior.
Koradior intends to use half of the IPO proceeds to open 37 retail stores in the second half of this year (26 in department stores and 11 in shopping malls) and 75 self-operated stores next year (43 in department stores and 32 in shopping malls).
Twenty per cent of the proceeds will go towards brand development; 10% to help expand its web presence; 10% for brand promotion and marketing; and 5% to upgrade its enterprise resource planning (ERP) system.
