Menswear company China Lilang yesterday launched an IPO that could raise as much as $155 million and puts it on course to become the first Chinese menswear company to list in Hong Kong.
The deal consists of 300 million primary shares, representing 25% of the company. The indicative price range has been set at between HK$3.20 and HK$4.00 a share, resulting in a deal size between HK$960 million and HK$1.2 billion ($124 million to $155 million). A 15% greenshoe could introduce another 45 million shares into the deal, which could increase the total size to $178 million.
The portion for institutional investors takes up 90% of the total offering, with the remaining 10% put aside for the Hong Kong public offer.
Established in 1995, Lilang is a manufacturer and distributor of men's business suits. On its website, the company describes its brand concept as "simple but not simple". Alongside the business clothing, it has a more fashionable line aimed at younger consumers, as well as a sportswear line.
Lilang targets the mass-market, especially people living in China's second-, third- and fourth-tier cities. Since these are the urban areas that are growing the fastest, they are said to be good areas to focus on -- as people move up in terms of their standard of living, they are expected to spend more money on better clothing.
Branding and design are key parts of the business and the company has two brand ambassadors. For its main line it employs Chen Daoming, an actor famous for playing Chinese emperors, and for its younger line, it has recently taken on David Wu, a former MTV presenter who is now known in the mainland for television programmes that teach English. On the design side, Lilang is the only Chinese menswear company to have exhibited at fashion shows in Tokyo and Milan.
Lilang's main selling point is its leading market presence. Although the market is highly fragmented -- the top 10 players have a combined market share of around 25% -- Lilang has the largest chunk of the pie at 3.4%. With 2,500 points of sale, it also has a large distribution network.
The men's clothing sector, however, is considered to be less dynamic than its female counterpart; men generally buy clothes less often than women and, when they do, they spend less. But on the plus side, since there is less of an emphasis on fashion with men's clothing, there is a lower risk of producing something that goes against the prevailing tastes.
The capital raised from the IPO will be used to develop the company's studio in Shanghai and its production facilities in Xiamen; to pay for marketing of its sub-brand aimed at younger men; to lease and renovate flagship stores; and to pay off debt. The remaining money will be used as working capital.
The price range values the company at a price-to-earnings ratio of between 9.5 and 11.8 times its projected 2010 earnings, according to joint bookrunner estimates. Since there are no other Chinese menswear companies listed in Hong Kong, investors are looking towards companies like Belle International, a women's footwear retailer that is trading at around 19 times estimated 2010 earnings, putting Lilang at a 37.5% discount if it prices at the top. There is also China Dongxiang Group, a producer of fashion sportswear currently trading at around 15 times estimated 2010 earnings, which puts Lilang at a 21% discount.
The deal will close on September 16 and the trading debut is scheduled for September 26.
Bank of America Merrill Lynch and HSBC are joint bookrunners for the IPO. Both of these banks have recently arranged deals for companies with high levels of exposure to Chinese consumption. In June, Merrill helped sportswear company, 361 Degrees International, raise $280 million -- as of last night, the company's shares were down 7.5% from its listing price. In the same month, HSBC was a bookrunner on the IPO for herbal shampoo company Bawang, which last night closed 18.7% above its listing price.