Another Chinese retailer prices IPO at the top

Chinese hypermarket and supermarket operator Times pockets $113 million for expansion, including the opening of 18 new stores.
Three months after Wumart Stores called off a share acquisition agreement that would have provided the company with cash as well as access to the capital markets, Times Limited has raised much needed funds through a share offer of its own.

The Chinese hypermarket and supermarket operator obtained the maximum HK$880 million ($113 million) from a Hong Kong initial public offering, after fixing the price at the top of the range. A 15% greenshoe could increase the deal size to $130 million.

Demand from both retail and institutional investors was less overwhelming than for IPOs of other Chinese retailers, however, with the retail portion 39 times covered and the institutional book 34 times subscribed post-clawback. The clawback increased the retail tranche from 10% to 30% of the deal.

Last week, New World Department Store attracted $1.8 billion worth of orders from the retail market, which left the retail tranche of its $301 million IPO more than 60 times subscribed. This triggered a clawback that increase the retail portion to 40%. The institutional book ended up with over 400 orders and was more than 80 times covered post-clawback.

According to a source, Times attracted over 100 institutional orders. Approximately 80% of the demand came from Asia, with the remaining 20% split between Europe and the US. There was little price sensitivity and the conversion rate from the one-on-one meetings during the roadshow was very high.

Times set the price at HK$4.18, which marked the top of an indicative range starting at HK$3.60 and values the company at 18.6 times its 2008 earnings. This puts it at a discount to Hong Kong-listed Lianhua Supermarket, which trades at a 2008 price-to-earnings multiple of 20.8, according to Bloomberg data.

Times operates primarily in the eastern part of China, with the Jiangsu province being its main market. It also has operations in Shanghai and in the Zhejiang, Shandong and Anhui provinces. By the end of 2006, it had 52 stores, of which 32 were hypermarkets and the remaining 20 supermarkets.

The IPO came after the cancellation earlier this year of a deal with its larger Beijing-based competitor Wumart that would have provided Times with immediate access to the capital markets û thus enabling it to raise funds for expansion without going public itself.

According to an agreement between Times and Wumart in August 2006, the latter was to acquire a 50% stake in Times for HK$1.14 billion ($146 million) from its controlling shareholder CS International, payable half in cash, half in shares. The cash portion was to be raised partly through a placement of new H-shares.

However, in November, Wumart suspended trading of its shares and a couple of days later it announced that its former chairman had been detained to assist in an investigation by the Chinese authorities and that the placement was off. As the suspension and the cancellation of the placement meant it had become highly uncertain whether Wumart would be able to raise the necessary funds for the acquisition, Wumart and Times agreed to terminate their agreement in April this year.

Wumart continues to operate as normal, but has yet to resume trading.

Times posted a 19% increase in revenues in 2005 to Rmb2.4 billion, and another 20% in 2006 to Rmb2.8 billion ($362 million).

Its bottom line grew at a compound annual growth rate of 28.8% in the same period, which is slower than Wumart but faster than many of its other peers. It recorded a net profit of Rmb56 million in 2005, which then improved by 39% to Rmb78 million in 2006. According to a syndicate research report, the company projects 33% growth in net profit to Rmb104 million this year.

The company is looking to open 18 new stores in 2007 and 2008, targeting existing as well as new cities in eastern China. It will also be converting some supermarkets into hypermarkets as its markets become more mature, and is thinking of establishing distribution centres to free up space at its hypermarkets currently occupied by inventories. The aim of such an exercise would be to further increase its sales area.

Times offered 210.6 million new shares, equivalent to 25% of its enlarged share capital. HSBC was the sole bookrunner.

The proceeds will mainly go towards business expansion, although part of the money will be used to repay borrowings from HSBC. The trading debut is scheduled for July 16.
¬ Haymarket Media Limited. All rights reserved.
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