Ajisen taps $210 million from its IPO

The fast-food noodle restaurant operator prices its offering at the top as the Chinese consumption story prevails.
Ajisen China has priced its initial public offering at the top of the range for a total deal size of HK$1.64 billion ($210 million), showing resolute confidence from both institutional and retail investors in the growing Chinese retail sector.

The offering, which was the third Hong Kong IPO this year to give investors exposure to the Chinese consumption story after China Huiyuan Juice and Intime Department Store, had no price sensitivity in the book. It also had a high conversion ratio of 80% to 90% from the roadshow, which left the institutional tranche with a coverage ratio in the double-digits post claw-back, sources say. The claw-back, which saw the retail tranche being increased to 50% from 10%, was triggered after the retail offering drew HK$31 billion ($4.0 billion) worth of orders and ended around 190 times subscribed.

This compared with Huiyuan, whose retail tranche was 938 times subscribed and attracted $28.9 billion of retail demand, and Intime, which saw the retail portion of its $311 million offer generate $7.2 billion in demand leaving it 231 times covered. These two IPOs raised $308 million and $311 million respectively.

AjisenÆs institutional tranche recorded approximately 300 individual orders, of which only a few came from corporates and high-net-worth individuals. Most of the buyers came from Asia, which accounted for 58% of the demand, while Europe (including the UK) and the US accounted for 28% and 14% respectively.

Ajisen priced the IPO at HK$5.47, which marked the top of an indicative range starting at HK$4.47. The company sold 300 million shares, of which 96.9% were new. The total sale accounts for 30% of the company, which could increase to 34.5% if the 15% greenshoe is exercised in full. If so, the total proceeds will also rise to $242 million. Cazenove Asia was the sole bookrunner for the offering.

The final price valued Ajisen at 33 times its 2007 estimated earnings, according to a source, which compares with CafT de Coral at 20 times and Fairwood at 16 times. Although Ajisen was priced at a premium to the Hong Kong-listed fast food outlets, it argues that both CafT de Coral or Fairwood have most of their operations in Hong Kong and therefore are less comparable.

Instead, the company compares itself primarily to department store operators like Parkson Retail and even Li Ning, a retailer of its own brand sporting goods, on the basis that these too rely on brand exposure and the opening of new outlets in China for their future growth. As of last Friday, Parkson and Li Ning fetched 2007 P/E multiples of 47 and 38 times respectively.

ôInvestors are attracted by its potential growth, well-established brand and Chinese consumption conceptö, says a close observer to the deal. ôTheir main concern is whether the company can meet its aggressive expansion targetö.

Ajisen currently has 122 restaurants in China, including 17 (plus two franchised outlets) in Hong Kong, in which they sell Ajisen Noodles and other dishes through an exclusive franchise in Greater China granted by the Japanese producer Shigemitsu Sangyo.

It is looking to expand this chain of outlets to 200 by the end of this year and 320 by the end of 2008 mainly through organic growth targeted at second and third tier cities in the Mainland. However, the company is also looking at potential M&A and franchises (something it hasnÆt yet tried in the Mainland), which could speed up the pace of expansion further.

Even with the costs involved in opening this many outlets, the company is expecting a net profit compound annual growth rate of 30%-50% in the next few years starting from a profit of more at least Rmb110 million ($14 million) last year, the source says. The company achieved more than Rmb600 million in revenues in 2006.

Other parts of the companyÆs growth strategy will include diversifying its sales channels to places like department stores and supermarkets and to create new brands that will incorporate its other products, including Wagyu BBQ beef, drinks and desserts. It is currently selling desserts under the Azabu Jyuban Sabo brand.

The trading debut of Ajisen is scheduled for March 30.
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