A member of the state-owned Xinhua Bookstores group, this will be the first book store operator to list in Hong Kong and will offer exposure to ChinaÆs highly regulated book publishing and distribution industry at a time when it is undergoing extensive market-opening reforms.
Xinhua Winshare, which derived 81% of its revenues last year from the distribution of textbooks and educational supplements, is one of the early movers in response to these reforms both with regard to vertical integration and geographical expansion. And according to syndicate analysts, it is well-equipped to venture outside its home market in the Sichuan province and become an industry consolidator.
ôThis company has a first-mover advantage in a very fragmented industry and a good provincial platform that it can leverage in other areas. The key question is whether the management can do it,ö one observer says.
Among the potential hurdles is the fact that other provinces already have their own Xinhua Bookstores which will provide competition on their home turf. Some of them are also expected to follow Xinhua WinshareÆs lead and expand outside their own provinces.
However, the company was ranked as the fourth largest among all the provincial Xinhua Bookstores in 2005 in terms of sales and is widely regarded by industry experts as one of the most reputable book distributors in China, according to the syndicate report. Adding to its Rmb2.54 billion ($330 million) in revenues that year, the company also has a strong balance sheet and positive cash flow, which makes it one of the likely candidates to succeed, the analysts argue.
ôWe believe very few Chinese book distributors can measure up to Winshare, and we see its weakness mainly in relation to the foreign players who are now entering China gradually,ö the same report notes, adding that the latter are still more sophisticated and efficient when it comes to marketing, management and risk control.
Xinhua Winshare is offering 33.5% of its enlarged share capital in the form of new 369.4 million new H-shares. The price will be between HK$4.50 and HK$5.80, which will result in a maximum market capitalisation of $818 million at the time of listing.
However, there is also a 15% greenshoe which could lift the total deal size to as much as HK$2.46 billion ($315 million) and the market cap to $859 million. The offering has the usual 90-10 split between institutional and retail investors and standard claw-back rules apply.
The deal, which is arranged by BOCI Asia on a sole basis, will close on May 22 after a roadshow that aside from Hong Kong will also visit Singapore and the UK. Given the relatively small deal size, the company will not meet with US investors. The pricing is expected to be finalised on the same day the books close and the trading debut is scheduled for May 30.
The price range values the company at 16.2 times to 20.8 times its fully-diluted 2006 earnings, or at 17 to 21.9 times on a post-shoe basis. This translates into a slight discount versus overseas peers, which trade at an average 2006 price-to-earnings multiple of 23 times. That calculation doesnÆt include its Chinese competitor, Shanghai Xinhua Media, which is listed in Shanghai and û due to the shortage of quality paper in the domestic market - trades at a highly exaggerated historical P/E of 76 times.
The overseas comparables, which include US-listed Barnes & Noble, Borders Group and Books-A-Million, as well as the HMV Group in London and SingaporeÆs Popular Holdings. As a group, they are forecast to see earnings per share expand at a compound annual growth rate of 9.6% in 2006-2008.
Xinhua Winshare posted a 10.2% rise in net recurrent profit in 2006, and its retail division should be able to grow faster as the company opens more an bigger stores. However, a discount to overseas players is seen to be justified given the risks associated with an evolving industry.
Xinhua Winshare currently has 193 stores of which only two are outside the Sichuan province and is planning to spend Rmb300 million to Rmb500 million to expand its retail network over the next three to five years. In addition, the company is also in the process of building a nationwide agency business that will bridge the gap between the small publishers and retailers across the country. Being one of the first Xinhua Bookstores to set up such a business, Xinhua Winshare has ôa tremendous opportunity be consolidator and make ChinaÆs bookÆs industry more efficient,ö one source says.
In anticipation of the eventual opening up of the countryÆs publishing industry, Xinhua Winshare has also started to provide ancillary services to publishers of supplementary educational materials over the past few years. The aim is that it will be able to integrate ôbackwardsö into this industry as well once it becomes allowed.
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