Samsonite bags $1.25 billion from Hong Kong IPO

Investors crowd a meeting hall during Samsonite's investor presentation in Hong Kong (AFP)

Luggage specialist Samsonite International has raised HK$9.73 billion ($1.25 billion) ahead of its Hong Kong listing later this week after fixing the price at HK$14.50 per share. The final price is in the lower half of the initial range of HK$13.50 to HK$17.50 and at the bottom of the HK$14.50 to HK$15.50 guidance given to investors towards the end of the bookbuilding, which seems symptomatic of the current market environment.

The Hang Seng Index fell for a seventh straight day on Friday, bringing the total losses so far in June to 5.3% and leaving the index down 2.7% year-to-date. At the same time, many of this year’s Hong Kong IPOs, with the exception for a few small deals, continue to trade poorly in the secondary market, making investors cautious about committing more money.

MGM China, which was one of the most popular IPOs this year with orders from more than 500 institutional investors, an institutional coverage ratio of more than 10 times and a retail subscription ratio of 21 times, fell 5.5% in its first week of trading. The company priced its offering at the top of the range for a total deal size of $1.5 billion.

Meanwhile, Huaneng Renewables dropped as much as 11.2% when it started trading on Friday, sending another sigh of disappointment through the market. However, a gradual narrowing of those losses during the session allowed it to finish the day just 2.8% below the IPO price. The wind power unit of China’s largest power producer, China Huaneng Group, fixed the price of its $800 million deal in the lower half of the range, but still came under pressure after one of its key competitors, China Datang Corporation Renewable Power, fell 9% in the week between Huaneng’s pricing and its trading debut.

“The regular IPO participants are the ones bleeding the most at the moment,” one source noted, and as a result they are extremely reluctant to give anything on the price, he said. This refers in particular to hedge funds and other momentum players, such as high-net-worth individuals.

However, there was enough interest from deal-specific investors who liked the company to fill that gap and in general investors responded well to the fact that the price guidance was not too aggressive. Many had supposedly waited to find out where the guidance would be before placing their orders.

Overall, about 200 institutional investors came into the deal and the institutional tranche, which accounted for 90%, was said to be about three times covered. Most of the buyers were long-only investors. There was some demand from high-net-worth accounts, but they got very little allocation, the source said. In fact, the institutional allocation was quite concentrated with 50% of the shares going to the top 10 accounts and 70% to the top 20 accounts. Everybody else was scaled back. The intention is obviously to try and limit selling as the company starts trading and perhaps also to create some demand from investors wishing to top up their allocations. It remains to be seen whether this will work.

The 10% retail tranche was fully covered, but didn’t receive enough demand to trigger a clawback, which would have taken a subscription ratio of at least 15 times. This was perhaps a bit surprising, given Hong Kong investors’ usual appetite for consumer product stocks and well-known retail brands in particular, but again, the negative market environment is likely to have played a role. Some investors may also have elected to wait for Prada, which will start to accept orders from retail investors for its $2 billion to $2.6 billion IPO today. The Milan-based fashion icon is expected to draw strong interest from retail investors who are already keen buyers of its designer clothes and handbags. However, the institutional demand so far appears to be less enthusiastic than initially speculated in the local media.

Samsonite sold 671.2 million shares, of which 82% were secondary shares that came from its two major shareholders, private equity firm CVC Capital Partners and Royal Bank of Scotland. The total number of shares represented 47.7% of the issued share capital before the exercise of the overallotment option. CVC will own 29.8% after the IPO, while RBS’s stake will fall to 15.8%.

The final price of HK$14.50 translates into a 2011 price-to-earnings multiple of 18.3 times, which values Samsonite at a decent discount versus L’Occitane International, which is the only other non-Asian consumer product brand listed in Hong Kong. The cosmetics and skin care products company is trading at a P/E of 21.4 times its projected earnings for the fiscal year to March 2012 after gaining 33% since its trading debut in early May last year.

It also comes at a discount to Chinese retailers such as shoe manufacturer Belle International, which closed on Friday at a 2011 P/E multiple of 26.4 times; high-end/luxury menswear retailer Trinity, which is quoted at 26 times; and watch retailer Hengdeli at 21.8 times. Domestic fashion designer Ports Design is quoted at 15.9 times.

Samsonite, which is primarily known for it hard-sided suitcases, but also operates cheaper luggage brands such as American Tourister and AT, and makes casual bags for travelling, doesn’t have the same image of luxury as Prada, but has a high level of brand recognition. The company is six times larger than its nearest direct competitor in terms of sales and its suitcases can be found at 37,000 points of sale in more than 100 countries. It derived one-third of its sales and more than 40% of its earnings from Asia last year and says it expects Asia will be an increasingly important driver of growth and profitability as the region’s middle class spends more money on travelling.

It is an asset-light operator that last year outsourced 94% of its manufacturing to third parties, primarily in China and the rest of Asia, and derived about 80% of its sales from wholesale channels such as department stores, specialist luggage retailers, mass merchants like hypermarkets or discount stores, and online retailers. This keeps its cost base low and allows it to maintain good margins, while also requiring less capital expenditure.

Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland and UBS were joint bookrunners for the offering.

 

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