Hong Kong-based apparel manufacturer, Crystal International Group, stands poised to end to a long dry spell of initial public offerings by homegrown companies, as it finalises details for a stock market flotation that could raise between HK$3.7 billion and HK$4.5 billion ($476 million to $574 million).
The company, which was founded in 1970 by local tycoon Kenneth Lo Lok Fung, represents the first $100 million plus homegrown IPO in more than 19 months if it successfully lists next month.
Aesthetic medical service provider Union Medical Healthcare was the last homegrown company to list on the local stock market in March last year. Typically Hong Kong’s IPO market is dominated by Chinese companies.
Union Medical is well-known locally because it owns the well-advertised Dr Reborn brand. By contrast, Crystal Group is little-known outside the textile industry because it does not have its own brand.
Instead it focuses on clothing design and production for international lifestyle apparel brands such as Uniqlo, H&M, Gap and Abercrombie & Fitch.
Crystal Group expanded into sportswear and outdoor apparel manufacturing since late last year after buying Singaporean clothing manufacturer Vista for $190 million. The acquisition contributed $98.4 million in revenue, or about 9.6% of the group’s total income in the first half of the year.
The apparel manufacturing industry is well known for reporting low margins, and Crystal Group is no different. Its 7% net profit margin last year was, in fact, lower than some of its peers such as Texhong Textile and Regina Miracle, which both reported net margin of 8.7%.
Crystal Group’s strength lies in its diversified portfolio of more than 50 brands, making it a slow-growing but stable company from an investment perspective.
At the same time, the company’s manufacturing facilities are spread across China, Vietnam, Cambodia, Bangladesh and Sri Lanka, effectively mitigating natural disaster and political risks on any single market.
Deal terms
Crystal Group is currently fully-owned by the founding Lo family. The IPO will see the family disposing 18% of their stake on a pre-greenshoe basis, and 20.2% post-shoe.
The Reg S/144A deal features 509.3 million new shares, which are being marketed at a range of HK$7.3 to HK$8.8 per share. This translates to an implied market capitalization of $2.6 billion to $3.2 billion.
The deal is structured with a standard 15% greenshoe option and a 90/10 split between institutional and retails investors subject to clawback.
Based on syndicate analyst estimates, Crystal Group will be valued at 12.8 times to 15.5 times 2018 earnings pre-shoe and 13.2 times to 15.9 times post-shoe.
However, investors may find it difficult comparing these figures to other apparel manufacturers because they trade at a fairly wide valuation range. For instance, Shanghai-based Texhong Textile trades at a relatively low multiple of 6.2 times earnings on one-year forward basis, but Regina Miracle and Shenzhou International trade at 28.2 times and 19.4 times respectively.
In any case, the implied valuation should to a large extent reflect Crystal Group’s fair market value since the IPO will be mostly distributed to the public.
The company has accepted cornerstone investment from two of its largest customers totaling $30 million, representing a maximum of 6.3% of the IPO size. Fast Retailing, which owns the Uniqlo brand, will invest $20 million, while L Brands will subscribe to $10 million worth of shares.
Joint bookrunners of the IPO are Morgan Stanley and HSBC.
