Another Chinese shoemaker to list in Hong Kong

China-based footwear manufacturer, Stella International, aims to raise up to $387 million in the wake of BelleÆs successful offering.
Stella International Holdings has kicked off the roadshow for its initial public offering following strong demand for the listings of fellow shoe manufacturers Belle International Holdings and Walker Shop in the past two months.

Belle, which is ChinaÆs largest manufacturer of womenÆs shoes, drew more demand for its $1.1 billion IPO than the countryÆs largest bank whose total offering was 22 times the size. Its price surged 31% on the May 23 trading debut to a close of HK$8.14 and as of yesterday it was trading 42% above the IPO price. Walker, a smaller Chinese footwear retailer, also attracted hefty demand from investors and climbed 17% on the first trading day on June 7 to HK$4.51. Since then it has come back slightly, however, and yesterday closed 4.7% above its IPO price.

Stella is seeking up to $387 million from the IPO, which could increase to $445 million if the 15% greenshoe is exercised in full. It is offering 25% of its enlarged share capital, equivalent to 195 million new shares, at a price ranging from HK$12.50 to HK$15.50. Of the total, 90% will go to the institutional tranche, while 9% will be earmarked for retail investors. The remaining 1% will be reserved for employees of the company.

There is a standard clawback mechanism that could increase the retail tranche to as much as 50% in case of heavy oversubscriptions.

The manufacturer has brought in Dickson Poon, chairman of Hong-Kong listed retailer Dickson Concept, as a cornerstone investor. Poon will buy $30 million worth of shares in the deal, giving him a stake of roughly 7% to 10% at the time of listing.

Goldman Sachs is the sole bookrunner of the deal.

The price range values the company at a 2008 price-to-earnings multiple of 10.2 to 12.7, which compares with 11.7 times for athletic footwear manufacturer Yue Yuen Industrial (Holdings). The latter has fiscal year that ends in September, making the valuation horizon slightly shorter.

Having set the price range at a P/E close to that of its larger comparable, Stella looks a bit too expensive, some observers argue.

ôItÆs just a manufacturer. Its retail business is much smaller than that of Belle International, so itÆs not a very attractive choice at this point of time,ö says one analyst.

ôIf I were to pick a shoe manufacturer stock at the same price level, I would pick Yue Yuen, which is much larger,ö another analyst adds.

Yue YuenÆs share price climbed 47% from mid-June 2006 to a high of HK$29.25 in mid-February this year. Its price has been following a downward trend since then, with a close of HK$25.40 yesterday (June 20).

Stella develops and manufactures footwear products for a range of leading casual fashion footwear companies and large well-known chain-store retailers as well as for high-fashion brands worldwide. It also provides footwear development and fashion footwear design services.

The manufacturer recorded net profits of $91.4 million in 2006, which represented 7% growth from the previous year. This came on the back of a 62% increase between 2004 and 2005. Revenue growth has been more stable, with an increase of 16% in 2005 and another 16% in to $779 million last year.

Stella projects its profit will grow 14% to $104 million this year, while revenues are expected to continue to expand at a compound annual growth rate of 16% from 2006 to 2008 and, according to a source. The growth will be driven by increasing outsourcing of European brands to Asia.

The source notes that the big brands like Nike has been outsourcing to Asia for a long time, but it was not until recently that fashion brands in Europe started to outsource their production of high-quality shoes to Asia.

ôStella is the only one who has the ability to do these high-quality shoes in Asia,ö the source says. ôWith the proceeds (from the IPO) it will be able to expand its production capability to capture more of their (European fashion brands) outsourcing.ö

Casual footwear is the largest and fastest growing footwear segment in the world, with a market size of $77 billion in 2006 and a CAGR of 7.5% from 2004 and 2006. Athletic footwear is the second largest segment at $65 billion, but the growth rate is lower at a 2004-2006 CAGR of 5.9%. Fashion footwear had a market size of $16 billion and a CAGR of 7.3% in the same period.

Compared with mass-production athletic footwear manufacturer Yue Yuen, Stella also claims that it has the flexibility to manufacture a broad range of customised designs with short lead times, and the scale to achieve cost efficiency.

Following in the footsteps of its peers, Stella established a retail business in 2006, selling its own footwear and accessories products under the brand Stella Luna. It also entered into an agreement with Marc Fisher LLC to sell Guess womenÆs fashion footwear in China. According to the source, the retail business reached breakeven after six months of operation. The company currently has 41 flagship stores, boutiques and concessionary shops in 18 major China cities, and plans to add 25 more this year. It also runs three stores in Thailand and plans to open three more this year.

While providing an additional source of income, the expansion into the retail sector does also pose risks since it is a new player in the sector with only one year of experience. Stella also faces rising production costs in China as the renminbi continues to appreciate and labor costs surge.
The company has four manufacturing facilities in the Guangdong province with 36 production lines, as well as six other facilities in China and Vietnam. As of 2006, the estimated total capacity of its production lines in China and Vietnam was approximately 45 million pairs of footwear per year.
Its customers comprise a range of well-known footwear companies and brands, including casual footwear companies Clarks, Deckers, Rockport and Timberland; fashion footwear companies Cole Haan, Kenneth Cole and Nine West; high-fashion brands Celine, Christian, Emilio Pucci, Givenchy, Kenzo, Loewe and Marc by Marc Jacobs; as well as large chain-store retailers like J.C Penney, to mention but a few.

Of the net proceeds, roughly 44% will be reserved for mergers and acquisitions opportunities, while 27% will go towards the repayment of a short-term loan made to finance pre-IPO special dividend payouts. The company will also spend around $35 million and $30 million, accounting for 10% and 9% of the total proceeds raised, to expand its production capacity and retail business respectively. The remainder will be used for general working capital.

The final price is expected to be determined on June 28 and the Hong Kong trading debut is scheduled for July 6.
¬ Haymarket Media Limited. All rights reserved.

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