L'Occitane targets $708 million from Hong Kong IPO

L'Occitane International, the French cosmetics and skincare brand, yesterday kicked off the institutional roadshow for its Hong Kong IPO, which is aiming to raise between HK$4.69 billion and HK$5.49 billion ($605 million to $708 million).

If successful, it will become the first French company to list on the Hong Kong stock exchange, and as such will be a major feather in the cap for the stock exchange marketing team, which has worked hard in recent years to attract companies from outside Greater China to its main board. It will also show that Hong Kong has an allure not just as a potential hub for resources companies that are targeting China as a major market for their goods, but for other types of companies that are looking to expand in Asia as well.

L'Occitane, which is based in Provence, is already a well-known brand in most of the region and Japan is currently its largest market globally (followed by the US and France), but the company's growth strategy involves focusing particularly on the huge, but still emerging, consumer markets in Brazil, Russia, India and China (the Bric countries) as well as in Mexico, where it sees the strongest growth potential. The company started off conservatively in China, where it opened its first store in 2005, but impressively it has been profitable in this market from day one, which is rare for a foreign brand.

This has clearly not gone unnoticed and its IPO has already received a nod of approval from China Investment Corp, China's $200 billion sovereign wealth fund, which has agreed to support the IPO as a cornerstone investor. CIC will buy $50 million worth of shares, or 8.3% of the deal if priced at the bottom of the range.

The deal comprises 25% of the company or 364.12 million shares, which are offered at a price between HK$12.88 and HK$15.08. Based on the projected earnings for the fiscal year to March 2011, this translates into a price-to-earnings multiple of 18.7 to 21.9 times.

Sources say this is well below the fair value estimated by some of the syndicate banks, and it also pitches L'Occitane at a discount to Japanese peers such as Shiseido and Fancl, which currently trade at 2010 P/E multiples of about 30. However, it will look more expensive versus fellow French brand L'Oreal, which as of yesterday was quoted at 21.2 times this year's earnings.  

Of the total number of shares, half will be sold by the company and half by parent company L'Occitane Groupe. As usual in Hong Kong, 10% of the deal will be set aside for retail investors. The final price will be determined on April 30 and the shares are scheduled to start trading on May 7.

Sources have earlier said that they feel L'Occitane will be a relatively easy sell, especially with retail investors, who are already familiar with the brand, which is known for its natural and organic ingredients and fragrances. Provence, where the company grows the lavender, olive and essential oils that are the major ingredients of its products, is also a popular holiday destination with Asian tourists who are apparently fascinated by the scenery in the region.

Institutional investors may be looking more at the numbers behind the image, but they too seem to spot some potential and one source said orders were coming in at a steady pace after the management's lunch presentation in Hong Kong yesterday.

In the three years to March 31, 2009 L'Occitane's net sales grew at a compound annual growth rate of 26.7% and in the last of those three years the sales amounted to €537.3 million ($723 million). In the nine months to December 31, 2009, the company had sales of €462.7 million. On this it earned a net profit of €58.4 million in the year to March 2009 and €66.4 million in the nine months to December last year. It also estimates a net profit of €73.8 million in the fiscal year to March 2010, representing a 26% increase from the previous year. All according to a preliminary listing document posted on the stock exchange web site.

The company's products are sold in more than 80 countries through 1,500 retail locations that either sell L'Occitane products exclusively or are decorated with standardised L'Occitane design. Of those retail points, 753 are the company's own stores, 470 are operated by third party distributors and 294 are operated by airport and duty-free customers. It opened its first store in Hong Kong in 1995.

Its products are also distributed through its own internet shopping websites, mail-order and spas.

Profitability will be a key consideration as the company continues to expand, L'Occitane said in the listing document. "Our principal consideration in deciding whether to establish a new store is the store's expected contribution to our profits. We intend to open new stores subject to expected rate of investment return, and would not normally establish a new store merely to gain market share."

The IPO is being arranged by CLSA, HSBC and UBS.