The company is selling 25% of its enlarged share capital and the price range has been set at HK$1.38 to HK$1.98 a share. There are 500 million shares on offer, with an additional greenshoe of 15%, which could bring in a further $19 million at the top of the range. Out of the base offering, 80% of the shares are primary, with the remaining 20% are secondary shares that will be sold by Richwise, a Shenzhen-based domestic private investor. The greenshoe is composed entirely of secondary shares. Goldman Sachs, one of the arrangers of the deal, holds 8% of the company pre-IPO, but wonÆt be selling any shares in the offering.
XDLong produces a mid-tier, mass market product with a main emphasis on sports shoes. With a track record of only seven years, it is has not had as much time to establish itself in China's first-tier cities as older market incumbents such as Li Ning. One source says this means the company is focusing its distribution in second- and third-tier cities. Its competitors also have a presence here, but not as strong as in their more established markets in the first-tier cities.
XDLong will use the money from the IPO to expand its distribution network and to promote its brand. Marketing will take up 33% of the capital and include the sponsorship of a TV programme on CCTV, China's state television service, during the Olympics. Leveraging the enthusiasm for sports that the Olympics are expected to bring is said to be a major factor in the companyÆs decision to come to market now.
The indicative price values XDLong at 8.5 to 12.2 times its estimated 2008 earnings, which at the bottom of the range makes it look quite attractive versus two other Chinese sportswear companies that have recently listed: Xtep and Pou Sheng.
But both have been far from successful. Pou Sheng, which has no brand of its own but an extensive retail network for the sale of top international and domestic brands, including Nike, Adidas and Reebok, has fallen 12% since debuting on June 6, while Xtep is down 27% from its debut on June 3. Having come to market at 2008 price-to-earnings ratios of 17.8 and 17 times respectively, Pou Sheng and Xtep now trade at much cheaper valuations of 13.4 and 11.7 times. The two companies priced their offerings either right at the bottom of the indicated price range (Xtep) or very close to it (Pou Sheng).
Not surprisingly, therefore, a great deal of the pre-marketing of the IPO has been spent on identifying differences between XDLong and its competitors, rather than the similarities. XDLong is different from Xtep in two ways, says one source. First, its products are of a higher quality, though in a similar price range. Second, the company is more efficient: Xtep has a cash-to-conversion cycle of 94 days, while the same cycle for XDLong is only 14 days.
The companyÆs sales expanded at a compound annual growth rate of 107% between 2005 and 2007, while net earnings grew at a 211% CAGR in the same period and are expected to double between 2007 and 2008. Despite these favourable fundamentals, the poor sentiment for Hong Kong IPOs at the moment is likely to remain a concern for investors. Aside from the poor debuts of Pou Sheng and Xtep, the other four newcomers over the past month have also lost a significant part of their market cap since they started trading. Most disappointing is Chongqing Machinery and Electric Co, which is down 29.2%, followed by Central China Real Estate with a 18.2% decline, Shandong Chenming Paper with 17.8% and Little Sheep with 11.3%.
With such hefty declines, even investors who like the companies on offer may choose to stay away from the IPO, and instead buy the shares at cheaper prices in the market once they start trading.
The more established sportswear retailers have also been under selling pressure lately, with Li Ning now trading at a 2008 P/E of 25.5 times, while Anta Sports Goods is at 20.2 times and China Dongxiang, which owns the Kappa brand in China, is at 17.9 times.
Deutsche Bank and Goldman Sachs are arranging the deal for XDLong. The final price is expected to be determined on July 3 and the trading debut is scheduled for July 11.
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