361 Degrees prices IPO at HK$3.61

The sportswear company raises $231 million that it will use to develop awareness of its brand and improve its production facilities.

Chinese sportswear company 361 Degrees International will raise HK$1.9 billion ($231 million) ahead of its listing next Tuesday after fixing the price of its initial public offering at a level that everyone will be sure to remember. It is almost certainly a Hong Kong first in that the name of the company and the IPO price are one and the same, give or take a decimal point, although other companies have in the past priced their offerings to equal their local ticker codes.
The deal was priced below the mid-point of the indicative range between HK$3.15 and HK$4.35 at an eponymous HK$3.61. Sources said that the order book could have supported a higher price but that the final price was decided upon as a symbolic gesture to investors.
The base deal consists of 500 million new shares, representing 25% of the company. If the 15% greenshoe is exercised another 75 million shares could be introduced into the deal and bring the total offering size to $265 million.
The IPO price translates into a price-to-earnings ratio of 11.5 times predicted earnings for the 2009 fiscal year, which finishes at the end of June, and 8.7 times the earnings projected for fiscal 2010. This puts the company at a significant discount to other sportswear companies such as Li Ning, which is trading at around 16 times estimated earnings for 2010.
The institutional book was 10 times covered with participation from a mixture of long-only funds, sector specialists and hedge funds. Around half of the demand originated from Asia with the remainder evenly split between the US and Europe.
The retail portion of the deal was 42 times covered, which was enough to trigger a clawback that increased the proportion of shares allocated for the Hong Kong public offer to 30% from the original 10%. An advertising campaign in Hong Kong, including giant 361-branded shoes perched on the top of taxis, could have contributed to the strong retail turnout, but pent up demand also played a part, said a source.
Both institutional and retail investors were attracted to 361 because of its easy to understand business model, said one source. The fact that there are several other Chinese sportswear companies listed in Hong Kong also helped investors put a valuation on the company.
One of the company's main selling points is its rapid growth: since its foundation in 2003 it has expanded to become China's third largest sportswear company in terms of retail outlets, with 5,500 outlets as of the end of 2008. Revenue growth has been particularly strong and for the 2009 fiscal year the company is expected to have revenues of Rmb553 million ($80.8 million), increasing to Rmb721 million in 2010.
Some observers are saying that maintaining such high levels of growth in the future could be hard for China's sportswear sector.
"We are starting to see a gradual shift away from sportswear towards casual wear," said Paul French, chief China analyst of Shanghai-based research firm Access Asia. He added that this is happening more quickly in cities like Shanghai and Beijing, which suggests that sportswear companies will see greater opportunity in the less developed second- and third-tier cities. International casual wear brands such as Uniqlo, Zara and H&M, which all have a retail presence in China, stand to benefit from this trend.
With regards to the proceeds, 361 plans to spend 39% of the money to improve brand awareness. This will be done via advertising and sponsoring of major sports events. A further 32% will be used to improve the company's facilities in Fujian, including an increase of production capacity and the construction of a new corporate headquarters. The remaining cash will be used to develop a line of products aimed at children, to establish a research and development centre, and to create a resource planning system.
Merrill Lynch was the sole bookrunner of the IPO.

Another China consumption play, Bawang International, is scheduled to price on Friday. The herbal shampoo company is seeking to raise up to $215 million through an IPO arranged by HSBC and Morgan Stanley.

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