Bio Beauty targets $310 million from IPO

In a discouraging primary market, the China-based skincare and cosmetics producer tries to attract investors with a typical Chinese consumption story.
Chinese skincare and cosmetics producer Bio Beauty Group will kick off the retail portion of its initial public offering today amid news that other players have been forced to delay or downsize their offerings due to waning investor demand.

But the spin-off from Hong Kong-listed Global Green Tech Group is hopeful that its exposure to ChinaÆs fast-growing consumer industry will help attract investors. The company is aiming to raise up to HK$2.4 billion ($310 million) and, according to a source, the deal is already well oversubscribed.

Bio Beauty is involved in the research, development, manufacturing and sale of skincare products as well as colour cosmetics. It markets its products under the brand ôMarjorie Bertagneö and its distributors sells them China, Hong Kong and Macau through a network of 1,252 points of sales. The company is primarily targeting the retail market, but in early 2005 also launched a professional line aimed at health and beauty salons.

ôClearly the market it very different from where it was at this time last year when investors kept on buying every IPO right up until Christmas. This year the investor base is more focused on the ones that offer good valuations,ö one observer says.

And deeming from the fair value attached to the company by syndicate analysts, Bio Beauty should fit into that category.

At the indicated price range of HK$4.88 to HK$6.18, the listing candidate is valued 15.8 to 20 times its 2008 earnings, according to a source. This compares with 18 to 24 times for international comparables like Shiseido, Fancle, LÆOreal and Avon and an average of 30 times for other Chinese brand owners like sportswear chain Li Ning and fashion brand Ports Design. While in a different line of business, these are comparable with regard to the brand image and growth potential, the source says.

Investors also compare Bio Beauty to Hong Kong-listed Natural Beauty Bio-Technology, which currently trades at a multiple of 18 times its 2008 earnings.

This company is very different from Bio Beauty, however, since it primarily targets the mass market, while ôMarjorie Bertagneö is a European brand targeting the premier and medium-to-high market. Natural Beauty also distributes its products through beauty salons and department stores, while Bio Beauty distributes its products in a number of ways through brand image stores, cosmetics shops, specialty shops, as well as health and beauty salons.

ôIn terms of profitability, revenue and market capitalisation, this will be the largest Hong Kong cosmetic play focusing on the Chinese market,ö the source says of Bio Beauty.

Bio Beauty is offering 390 million shares, or 30% of its enlarged share capital through sole bookrunner Macquarie Securities. Of the total, 15% are secondary shares that will be sold by its parent company Global Green Tech and another majority shareholder. Global Green Tech will still hold 55.69% after the listing.

Ten percent of the shares have been earmarked for retail investors, while the remaining 90% will be sold to institutions, including cornerstone investors Chow Tai Fook and World Fund Pte, which will each buy $10 million worth of shares. Chow Tai Fook is the private investment vehicle of New World Development chairman Cheng Yu-tung, while World Fund Pte is a private company solely owned by Henry Sy Sr, chairman of SM Prime Holdings in the Philippines. A 15% greenshoe could increase the maximum deal size to $356 million.

Bio Beauty is led by an experienced management team. Connie Wong, the chief executive officer, has more than 30 yearsÆ experience in the skincare and colour cosmetics industry. She was the general manager of MaxFactor Hong Kong and Revlon Taiwan overseeing the Chinese market. Also equipped with over 30 years of experience in the industry is Grace Lui, the chief operating officer, who has previously worked at Revlon as general manager of marketing and sales in Hong Kong and at Borghese as general manager in the Asia-Pacific region.

As of September 30, Bio Beauty had invested in five brand image stores, covering the design and set up costs, although the stores are operated by its distributors. However, the company enters distribution agreements with the distributors to retain a degree of control over the brand image stores with regard to retail pricing, brand image at retail outlets as well as the locations of the stores. It plans to open approximately 200 brand image stores within the next four years and increase its distribution network as well as market presence.

The company relies heavily on sales in China, which accounted for 85.7% of its turnover in 2006. Its profit increased nearly 40% to HK$142 million in 2006. Bio Beauty is also one of four producers in China who can produce a polypeptide referred to as Human Epidermal Growth Factor, or hEGF, which has been proven to encourage human skin growth. hEGF is included in all of its Marjorie Bretagne skincare products.

So far, Bio Beauty has developed over 1,231 skincare products and colour cosmetics, of which it has launched 761. Of these, 120 skincare products and 10 colour cosmetics were developed under the Marjorie Bertagne brand, which was permanently assigned to Bio BeautyÆs parent company by its French OEM (original equipment manufacturing) manufacturer Cosme-Tech in 2001. It has been awarded as a ôTop 10 Most Popular Brands in China Cosmetics Industryö by the China Brand and Brand Development Strategy Committee.

Investors should be aware, however, that the skincare products and colour cosmetics industry is characterised by vigorous competition and rapidly changing market trends. The use of hEGF in skincare products is not exclusive to the producer, and a potential reduction of import duty as a result of ChinaÆs entry into the World Trade Organisation could intensify competition further.

Bio Beauty will spend around 34.5% of the net IPO proceeds over the next four years on marketing and promotional activities, while another 46.8% will be used to develop and promote its new line of business, to invest in its new brand image stores in China and to repay outstanding loans. Approximately 8.7% of the funds will go towards the expansion of its retail network, the construction of new production plants and the acquisition of new production equipment.

Bio Beauty was initially scheduled to start its Hong Kong public offer last Friday, but had to postpone it by a couple of days after the stock exchange asked it to respond to an anonymous letter sent to the exchange and several media outlets.

Similar unsigned letters alleging various wrongdoings at several other Hong Kong listing candidates have been sent to the stock exchange recently and have all proved to be pure fabrication and without merit. But since the stock exchange insists on taking them all seriously they have been able to disrupt or delay the IPO process for several companies.

Bio Beauty now plans to close its offering on Friday and expects to decide on the final pricing by the following day at the latest. The trading debut has been rescheduled for December 14.
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