China Ting launches IPO

OEM silk manufacturer sets out to raise at least $115 million.

Capping a busy month for lead manager BNP Peregrine Paribas, the bank has launched a $115 million to $140 million IPO for OEM silk manufacturer China Ting. Pre-shoe the company will have a free-float of 25.13% based on an offer size of 500 million shares.

The indicative price range has been set at HK$1.80-2.20, equating to a 2005 price/earnings ratio of 9.7-11.8 times. By comparision, OEM textile manufacturers Texwinca and Fountainset trade at 13.9 and 11 times 2005 earnings respectively.

However, China Ting also has a retail component, which contributes 10% of the company's overall revenue. The company operates four of its own brands, namely Finity, Elanie, DBNI and Riverstone.

It also operates two brands under license in China, Burlington House and Max Studio. However, Burlington House does not comprise apparel, but a range of home textiles, including pillow cases, bed sheets and bed spreads.

The branded portions of the business are focused on the mainland market, while the OEM segment of the business is oriented towards exports. The company's OEM business has a client list including Liz Claybourne, Zara, Saks and Macy's.

Branded retail comparables such as Ports Design and mainland sports apparel manufacturer Lin Ning trade at 25 times and 29 times 2005 earnings respectively. In 2005, the company made a net profit of HK$369 million. That compares to HK$192.8 million on revenue of HK$1.4 billion in 2004.

The company has shown strong gross profit margin growth, from 27% in 2003 and 28% in 2004 to 34% 2005. Specialists attribute the strong margins to the company's vertically integrated business model, from the weaving and dyeing down to the cutting of the apparel.

Silk is a difficult material to process, especially as regards the weaving, say specialists. "Silk is a premium product because of the inherent difficulty in working it. That enables solid pricing and hence margins," notes one specialist.

In addition, silk is far less vulnerable to World Trade Organization quota restrictions than cotton, he says. The company has a dividend pay-out ratio of 50%, equivalent to a yield of 4.9-6% at the current price range.

The company is to continue focusing on its existing silk OEM business and its branded business, but plans to eventually branch out into non-silk apparel. IPO proceeds will, in the first instance, be used to improve the OEM manufacturing facilities, then for the home textiles line, and finally for the retail segment. The company is majority-owned and operated by a Hangzhou family (in China's Zhejiang province), which has been resident in Hong Kong for decades.

Pricing will be set on December 9, with listing scheduled for December 15.

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