PCD Stores prices near top to raise $377 million

Department store operator PCD Stores (Group) has priced its initial public offering close to the top end of the offering range at HK$1.95 per share, allowing it to raise HK$2.93 billion ($377 million). The company will start trading in Hong Kong on December 15.

The offering was well-received by investors and, according to a source, the deal could have priced at the top of the HK$1.65 to HK$2.00 price range as there was very little price sensitivity among the orders. However, the secondary market has been quite volatile recently and it cannot hurt to leave a little bit extra on the table for the new shareholders.

PCD Stores owns and operates nine department stores and provides management consultancy services to another seven. The stores focus on high-end and luxury products, generally targeted to high-income earners, including brands like Armani Collezioni, Burberry, Cartier, Ermenegildo Zegna, Hugo Boss, Ralph Lauren and Ports 1961. Its flagship store, the Scitech Plaza in Beijing, contributed close to 52% of revenue and 59% of net profit in the six months to June.

The number of self-owned stores has more than doubled over the past few years from four in 2006 and the company will continue to expand at a rapid pace. According to a term sheet, close to 70% of the IPO proceeds will go towards new store openings, upgrading of existing stores and the acquisition of other department stores.

According to a source, part of the attraction of PCD Stores was that many investors were already familiar with the management and felt comfortable with their achievements so far. PCD Stores is backed by the same people -- the Chan family -- as Hong Kong-listed Ports Design and several of the management roles are held by the same people. Ports Design is a well-known women's retailer focusing on designer clothing.

But investors also liked PCD Stores' recent move into outlet malls, which gives it a bit of a different angle to the other Hong Kong-listed department store operators. Outlets are more about volume than margins, but analysts believe that they can become a future growth driver as Chinese consumers seek branded products at good value.

And, of course, the IPO did also come at a P/E valuation below 20 times, which translates into a discount versus most of its Hong Kong-listed peers. Based on the final price, the company is valued at 18.8 times projected earnings for 2010. Comparable mall operators such as New World Department Stores trades at about 21.4 times (based on a year end of June 2010), Intime Department Stores trades at 25.9 times and Maoye International trades at 19.2 times.

And compared with top-end operators, which are also significantly larger, the discount is even greater -- as of yesterday's close Parkson Retail Group was quoted at 27 times next year's earning, while Golden Eagle Retail Group was at 31 times.

Retail investors subscribed to about 43 times the number of shares initially earmarked for them, which triggered a partial clawback that increased the size of the retail tranche to 30% from 10%. Post clawback the institutional tranche was about 10 times covered -- not massive perhaps, but according to the source, the order book was of very high quality.

PCD Stores sold 37.5% of its enlarged share capital in the form of 1.5 billion shares. Two-thirds of those shares were new, while the rest came from venture capital firm 3i Investors and from the Chan family. 3i, which is among a number of high-profile pre-IPO investors that have supported the company since late 2005, sold all its shares in the IPO. Other pre-IPO investors include Credit Suisse, Citi, Deutsche Bank and Morgan Stanley, which will be locked up for six months after the listing.

Credit Suisse acted as the sole bookrunner for the offering.