Ajisen's IPO targets $210 million for aggressive expansion

The Greater China noodle restaurant operator wants to more than double the number of outlets it operates by the end of next year.
Ajisen (China) Holdings, which operates fast-food noodle restaurants in the Greater China area under the Ajisen Noodle brand, has kicked off the institutional roadshow for a Hong Kong initial public offering of up to HK$1.64 billion ($210 million).

Brought to market by Cazenove Asia, the company is another play on the China retail growth story and it will no doubt hope to tap into the strong demand for other recent consumption-related IPOs such as China Huiyuan Juice and Intime Department Store. Both of these deals appear to have been little affected by the recent correction in Mainland stock markets with Huiyuan up 54.5% since its March 23 debut and Intime able to price its $311 million offering at the top end of the range yesterday after strong demand from both retail and institutional investors.

Valuation will be key though, but sources familiar with the offering note that the indicative price range appears to have been set to reflect the increased volatility and uncertainty. A couple of fund managers said they had been approached with valuations of up to 40 times this yearÆs earnings during pre-marketing, but when the company launched the official roadshow in Singapore on Monday it was being pitched at a 2007 price-to-earnings multiple of 27 to 33 times.

However, the company is comparing itself primarily to department store operators like Parkson Retail and Golden Eagle 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.

And while AjisenÆs indicated valuation is at a discount to most of those, it comes at a premium to Hong Kong-listed fast food outlets like CafT de Coral or Fairwood. The company argues that these have most of their operations in Hong Kong and therefore are less comparable, but some observers say the valuation premium could make some investors hesitate.

As of yesterday, Parkson and Li Ning both traded at about 40 times this yearÆs earnings and Golden Eagle was quoted at 30 times, while CafT de Coral fetched a 2007 P/E multiple of 20 times. Fairwood was quoted at 13.3 times its projected earnings in the fiscal year to March 2008.

ôThe P/E level is expensive if you compare it to the Hong Kong peers, but Ajisen has a more aggressive expansion plan in China than CafT de Coral,ö notes one local broker, who says his clients are favourable to the offering. ôThe restaurants are well known in most of the big cities and Japanese things are very popular with teenagers and the 20 to 30-year-olds who are a high-spending group,ö he adds.

According to a source close to the offering, the companyÆs restaurants, which have been in the Mainland since 1994, are a mixture between fast food and casual sit-down dining. They require customers to spend between Rmb25 and Rmb80 per visit, which puts them in the upper end of the noodle shop market.

Ajisen currently has 122 restaurants in China, including 15 (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 than Rmb110 million last year, the source say. 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.

Ajisen is offering 300 million shares, of which 96.9% are new, at a price between HK$4.47 and HK$5.47. 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.

The selling shareholders include Chairman Daisy Poon, which will hold 56% of the company after the IPO together with Mr Yin, the CEO. Poon controls 95% of their combined holdings.

As usual, 10% of the offering will be earmarked for Hong Kong retail investors in a public offering that will run from March 19 to 22. The institutional order book will remain open to the 23rd with the pricing following shortly afterwards. The trading debut is scheduled for March 30.
¬ Haymarket Media Limited. All rights reserved.
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