Bawang starts premarketing for $250 million IPO

Bawang International is currently in the premarketing stage for an initial public offering that is expected to raise between $200 million and $250 million. The company is a Chinese herbal shampoo manufacturer that primarily targets men of a certain age: its products include an anti-hair-loss shampoo, a hair-blackening shampoo and an anti-dandruff shampoo.

Within the niche herbal market, Bawang is the top player with a 36% market share. In the more general shampoo market, it is the fourth largest shampoo producer in China with a 7.6% share, behind three brands that are all managed by Proctor and Gamble. And despite the fact that there are hundreds of shampoo brands in China, the top five companies have greatly increased their market share over the past few years - from 26% in 2006, to 49% in the first half of 2008.

A low base of shampoo usage, combined with rising incomes, makes Bawang a play on the China consumption story.

The Chinese, on average, use 0.21 litres of shampoo a year, compared to 0.35 litres in Malaysia and 0.69 litres in Taiwan. To put the usage level into perspective, Chinese consumption would have to increase by 10% every year for the next 10 years to match the Asian average. Euromonitor, a market research consultancy, expects shampoo usage to grow at a compound annual growth rate (CAGR) of 8% between 2007 and 2012.

Increasing shampoo consumption has already translated into greater earnings for Bawang. In the period between 2006 and 2008, sales volumes were up by a CAGR of 90%, operating profits were up by 70%, and net profits were up by 56%. In the 2005 to 2008 period, return on equity was 73%.

Rather than focus on the product itself, an analysis of Bawang should look at how the company markets itself, said one syndicate research report, since manufacturing shampoo is a simple process compared to the task of differentiating shampoo from its competitors.

As a brand, Bawang appeals mainly to male, middle-income consumers. A major part of the company's marketing strategy involves celebrity endorsement and to fit the target market, the shampoo is recommended by one of China's most famous middle-aged men, Jackie Chan, who is contracted to appear in commercials until 2012. And, in May, the company released a new brand targeting women called "Royal Wind", which will be endorsed by Hong Kong popstar Faye Wong.

As well as the big-name stars, the company actively emphasises its roots in traditional Chinese medicine, which is supposed to inspire its herbal ingredients.

The largest chunk of the capital raised in the IPO, 21%, will be used to enhance the brand via marketing and promotional campaigns. The development of new products, improving the distribution network, and the acquisition of new brands will each account for about 20% of the proceeds. The remaining 20% will be split between building new production facilities and working capital.

Although there are no direct comparables, Bawang is being compared to other household and personal care (HPC) companies. In Asia ex-Japan, companies in the HPC category are trading at around 22 times 2009 estimated earnings. Analysts are also comparing Bawang to other asset-light companies in broadly the same business of branding and distribution. These are trading at about 19.3 times.

Perhaps the closest peer is Hengan International Group, a Hong Kong-listed company that manufactures personal hygiene products, such as tissues, in China. It is trading at around 22 times. In the asset-light category, there is sportswear manufacturer Li Ning Company, which is trading at about 20 times, and Li & Fung, a Hong Kong logistics company, which is trading at about 21.5 times.

Premarketing will continue until next Monday, which is when a nine-day roadshow is scheduled to start. Pricing is expected on Friday, June 26. HSBC and Morgan Stanley are joint bookrunners for the deal.