Sportswear brand Xtep prices IPO at bottom

Xtep International, China's second largest fashion sportswear company, has priced its initial public offering at the bottom of the indicated range at HK$4.05 a share, raising HK$2.2 billion ($285 million) before its Hong Kong listing on June 3.

A source close to the deal says the institutional book was ôcomfortablyö covered. The 10% retail tranche was also fully subscribed, but not enough to trigger a clawback which would have required a subscription ratio of at least 15 times. XtepÆs bottom-end pricing is in line with the recent trend that has seen issuers and their bankers focus on getting listings completed, rather than pursuing a high price. It was a very different situation for Anta, a rival mainland sportswear firm that listed last year when the sentiment for Chinese consumption plays was at a high. Anta priced at the top of the range and was forced to allocate 50% of the deal to retail investors after a strong retail following triggered a full clawback.

In recent weeks, three companies û Maoye, Artini, and Asia Cement û have all priced either right at the bottom of their respective ranges or very close to it. There was also E-Land Fashion China, which abandoned its listing altogether after deciding not to accept a deal at the low end of the range.

The majority of investors drawn to XtepÆs offering were those that plan to hold on to their shares, rather than sell soon after the listing, says one source, adding: ôThere were a lot of fundamental investors, and not many momentum-driven investors in the book.ö China's increasing domestic growth, combined with the expected continued growth of the sportswear sector in the mainland, were the key selling point to investors.

With regards to geographical spread, although there was some interest from Europe and the US, most of the money came from Hong Kong investors, making long-term investments in mainland companies.

Based on earnings estimates for 2008, the final price values the company at a price-to-earnings ratio of 17 times. This puts it at a major discount to its main competitors Li Ning which is trading at 30.6 times, and Anta Sports Goods which closed yesterday at 25.8 times. It is somewhat closer to China Dongxiang Group which is trading at 21.5 times this yearÆs earnings after gaining a modest 1.8% during XtepÆs eight-day roadshow. Li Ning and Anta both fell, however, which at the margin may have reduced the attractiveness of XtepÆs offer. As of TuesdayÆs close (before the pricing of XtepÆs deal), Li NingÆs share price had lost 8.4% while the listing candidate was in the market and Anta was down 5.6%.

Xtep sold 25% of its share capital in the form of 700 million new shares. There is also a 15% greenshoe which could increase the total deal size to as much as $363 million. The deal was arranged by JPMorgan and UBS.

One source thinks the deal shows that confidence in the Chinese consumer sector remains robust; but another argues the pricing could have knock-on effects on other companies in the pipeline, most noticeably Pou Sheng Group, which is a spin-off of Yue Yuen IndustrialÆs retail distribution business in China. Pou Sheng is in the market trying to raise at least $309 million from an IPO that will close today. The source said that Xtep's pricing had set a precedent, and that it might be hard for the Yue Yuen spin-off to price any higher. Pou Sheng is being marketed at a 2008 P/E ratio between 17.1 and 21.7 times.

Since its establishment in 1999 as an original equipment manufacturer, Xtep now designs, manufactures, and distributes its own clothing and footwear. It has an 18.9% share of China's fashion sportswear market, second only to Kappa's with 22%. The latter brand is owned by China Dongxiang Group. When it comes to the more general sportswear market, Xtep has only a 3.4% share, behind Li Ning and Anta which control 9.3% and 7.4% respectively. Between 2008 and 2012, however, the fashion sportswear segment is expected to experience compound growth of between 38% and 40%, compared to an expected growth of 25% for the overall market.

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