Specialists are expressing cautious satisfaction with the IPO of Lifestyle International, which was able to price at the mid-point of its HK$7.30 to HK$9.30 range despite recent volatility and a truncated eight-day book build period over Easter.
Lead manager BNP Peregrine Paribas managed to avoid the worst of recent market sentiment raising HK$1.497 billion ($192 million) via a 180 million new share deal priced last Thursday at HK$8.30 per share. Once it is listed, the company's market capitalization of $760 million will make it the largest in the Hong Kong retail sector.
The institutional tranche, closed about three times covered, while the retail tranche was about seven times covered. The high visibility of the company's SOGO store in Causeway Bay is said to have been an important factor behind the higher retail interest.
Final allocations resulted in a split which saw institutions allocated 83% and retail investors 17%, of which 2.5% comprises company employees. Specialists say both the retail and institutional allocation were diminished to provide extra shares to the employees, which normally receive a 1% allocation.
By geography, around 42.5% went to Asia and Europe and the remaining 15% to the US.
The company listed at a price earnings ratio of 13.6 times 2003 earnings. The company did not put out an official earnings forecast for 2004.
Specialists say the company went into the pre-marketing phase hoping for a p/e ratio in the high teens. But they admit that volatile sentiment resulting from the China Resources People's Phone IPO, made the higher valuation more of a struggle.
There are no straight comparables since the company posted net profits margins of 21% last year, far in excess of other Asian, European or US retailers. US department stores such as Sears, May and Federated all record net margins in the single digits, as does France's Layfayette. Britain's Marks and Spencer, for example, stands at 6%. The average 'rest of the world' margin is just 3.7%.
Contrary to pre-market expectations, where a slight premium to the European comps was expected, 13.6 times is at a slight discount to European retailers, which average about 15 times 2003 earnings, and US retailers, which average around 17 times.
"Investors were especially heartened by the retail figures released by the Hong Kong government," says one speciliast. "These show a 13.2% year-on-year increase for February."
Of the total proceeds, some HK$530 million are being used for the company's Shanghai store in the Jingan district, HK$50 million for the renovation of the existing Causeway Bay store, HK$500 million for a third store in either Hong Kong or China and the remainder for working capital.
Total sales proceeds from the Causeway Bay store were HK$2.9 billion in 2003, and HK$2.8 billion in 2002. The store's sales make up 16% of department store sales in Hong Kong. Turnover, the figure for the commission on the sales generated by the consignees and the proceeds of the direct sales in 2003 was HK$1.33 billion, practically unchanged on the previous year due to SARS.
Net profits were HK$270 million in 2003, substantially up from the HK$40 million in 2001, the year of the takeover.
Three years ago, the bankrupt Japanese store was taken over by Hong Kong's Chow Tai Fook and real estate developers Joseph and Tomas Lau.
The company starts trading on April 15 and there is also a 15% greenshoe.
