Chinese consumption plays kick off IPOs

Down jacket designer Bosideng and Kappa-brand owner Dongxiang hope to raise up to $836 million and $702 million, respectively.
There is one investment concept that virtually every equity investor gets excited about and that is Chinese consumption. It doesnÆt really seem to matter what products these companies sell û as long as they are targeting the domestic market and are able to tap into ChinaÆs rising income levels and the urbanisation theme.

Not only have investors been piling into these consumption plays during their initial public offerings, but they have continued to buy them in the secondary market to the extent that the top brands now trade at 30-40 times their estimated 2008 earnings.

Investors now have two more of these companies to choose from after Bosideng International and China Dongxiang kicked off the institutional portions of their IPOs yesterday. The pair is aiming to raise a combined $1.5 billion.

Both companies have a strong position in their respective markets with Bosideng being ChinaÆs leading down apparel company with a market share of about 36% and Dongxiang owning the Kappa brand in China. The latter ranks as the countryÆs third largest international sportswear brand behind Nike and Adidas.

They also seem to have timed their issues well, given that equity investors now appear to have dropped all their concerns about a potential US recession, and whatever nasty implications that could bring for Asia, after the Federal Reserve cut its benchmark rate on Tuesday, as suggested by a 4.6% rally in the Hang Seng Index over the past two days. The rally took the index above 25,000 points for the first time ever and saw it close at a new record high of 25,701 points yesterday.

The fact that Bosideng and Dongxiang will be in the market at the same time isnÆt worrying anybody, given the tremendous amount of liquidity that is available. WednesdayÆs trading volume on the Hong Kong stock exchange topped HK$138 billion ($18 billion), which is more than 10 times the maximum size of these two offers combined.

Bosideng, which is the largest of the two, has set a price range of HK$2.56 to HK$3.28, indicating a base deal size of HK$6.52 billion ($836 million). Including the 15% greenshoe that could increase to $960 million, sources say. Goldman and Morgan Stanley are arranging this deal.

Dongxiang is looking to raise up to HK$5.47 billion ($702 million) via Deutsche Bank and Merrill Lynch, or as much as $807 million if the greenshoe is exercised in full. The price range is HK$3.60 to HK$3.98.

Aside from obvious similarities such as the fact that both companies benefit from the pickup in consumer spending and the growth of ChinaÆs middle class, both Bosideng and Dongxiang also emphasise their strong distribution networks and their intention to build a multi-brand strategy.

However, in many respects, they are different companies and this is especially obvious when looking at their respective brands. Bosideng, which was set up in 1994 and focuses on down jackets, vests and pants, has built its brands from scratch and currently owns three of ChinaÆs top 10 brands in the down clothing industry. ItÆs number one brand û Bosideng û has ranked as ChinaÆs leading down apparel brand for the past 12 years.

Dongxiang, which started as a subsidiary of Hong Kong-listed sportswear manufacturer Li Ning, has taken an entirely different approach by acquiring the ownership rights for the Kappa brand in China in May 2006. Of Italian origin, Kappa has the appeal of an international brand, which means it is able to charge higher selling prices. However, since it acquired the ownership, Dongxiang has revamped the product line using Asian designers to have it cater specifically to Chinese tastes and has been able to boost its brand value considerably.

Some observers argue that this gives Dongxiang a brand power that Bosideng lacks with consumers choosing to buy its products because they are Kappa products. BosidengÆs dominant market share means that its name is on a lot of jackets that are sold every year, but customers donÆt specifically set out to buy a Bosideng jacket, they say.

However, this may be changing as the company is intensifying the marketing of its top three brands û Bosideng, Snow Flying and Kangbo û which are all aimed at the mid- to upper end of the market. The fact that the company last week was one of only three brands in China, and the only apparel brand, to be awarded the recognition as a ôworld famous brandö in China by an official government agency also shows that the brand may have a bit more clout than observers outside of China may realise. People familiar with the company say this is also noticeable in terms of the companyÆs bargaining power over both suppliers and distributors.

By the same token though, a sizeable valuation discount compared with other China-based and brand-focused retail companies like sportswear chains Li Ning and Anta, fashion label Ports International or shoe manufacturer Belle International suggest the management does realise it has some work to do to catch-up with these leading brands.

In terms of valuation Bosideng is also suffering slightly due to the greater seasonality of its products, even though sources familiar with the company note that the sale of down jackets actually has a higher correlation with disposable income than with the weather.
The penetration rate in China is also quite low with only one in 10 people owning a down jacket, compared with seven of 10 people in Japan and close to half the population in Germany.

ôThe suggests huge growth potential,ö one observer says. ôFor China, we think the relatively low penetration rate, the rising income level and the less sheltered lifestyle bodes well for continued fast growth in apparel consumption. The sensitivity to warmer weather is also smaller at lower penetration.ö

According to a syndicate research report, spending growth on down apparel in China should be maintained in the double digits for the next three years at least.

ôAs the dominant player in the market, Bosideng is going to enjoy quite exciting growth,ö he adds.

The company is forecasting a net profit of at least Rmb950 million ($127 million) in the 2008 fiscal year, which suggest an improvement of 55% from the previous year. Based on those numbers, syndicate analysts project profit growth of about 26% in fiscal 2009 to Rmb1.2 billion.

Among its strengths, Bosideng also highlights its nationwide distribution network with 6,844 points of sales, which based on 2006 data puts it ahead of all its comparables, including Li Ning which has just over 4,000. The distributors are all third parties and include both specialty stores and concessionary retail outlets. The company also puts a lot of focus on technology development, quality control and design, but outsources all its manufacturing, which makes it very asset-light.

Dongxiang is positioning itself as a brand manager and outsources both manufacturing and retailing to third parties. Currently there are close to 1,500 Kappa-branded retail outlets in China and the growth will be driven partly by organic expansion of this sales neatwork, partly by the launch of a multi-brand strategy. The company also leases the rights to market Rukka in China, a Finnish clothing brand focusing on outdoor sports and sailing.

Benefitting from a forecast 23% compound annual growth rate of ChinaÆs sportswear market in 2006-2009, Dongxiang is expected to double its net profit in 2007 to Rmb623 million from Rmb306 million in 2006. Like for Bosideng growth will slow in 2008 to about 21% in 2008.

The price range values Bosideng at a pre-shoe price-to-earnings multiple of 16.4 to 21 times its earnings for the 2008 calendar year (the company has a fiscal year ending in March, but the numbers have been adjusted to make them more comparable). This is well below Li NingÆs 36 times, BelleÆs and AntaÆs 30 times and the 26 times that Ports is currently valued at.

However, it isnÆt that different to DongxiangÆs PE valuation of 22 to 24 times as implied by its price range. Some investors say they had anticipated a much greater discount of up to 30% and argue that this makes Bosideng look a expensive relative to Dongxiang. However, other note that given the optimism about Chinese consumption and the abundance of cash seemingly available to invest in Chinese stocks, both deals are expected to fly out the door.

Certainly, the inclusion of high profile cornerstones in both these deals indicate that they see value at the indicated levels.

According to sources, Bosideng has tied up Chow Tai Fook, Lee Shau Kee, Dickson Poon, China Life Insurance and Cheung Kong Holdings, who will each take $25 million of the deal for a total of $125 million. At the top of the price range that would give them about 15% of the total offering.

Dongxiang has set aside slightly less for its three cornerstones as a proportion of the deal. Sources say department store operator Intime has committed to buying $10 million worth of shares, while China Life Insurance and private equity firm Tiger Asia, which is a frequent investors in China IPOs with a consumer angle, will invest $35 million each. At the top of the price range, these $80 million will translate into about 11.5% of the total deal.

Dongxiang is offering 1.375 billion shares, or 25% of the company. About 86% of the shares are new, while the remaining 14% will be sole by two Morgan Stanley entities, which currently own a combined 20% of the company. After the IPO, their stake will fall to 12.2%. The greenshoe has the same 86-14 split as the base deal.

Bosideng is also selling 25% of the company, or 1.988 billion shares, of which 94.1% are new. The rest is being sold by HSBC Private Equity and will reduce its stake to 7.8% (pre-shoe) from 12.2% at present. The greenshoe is comprised of all new shares.

Both offers have the usual 90-10 split between the institutional and the retail offers, but standard clawback triggers apply and could see retail investors walk away with up to 50% of the deal in case of strong demand.

Both companies started marketing their IPOs towards institutional investors yesterday, but when the deals are eventually executed, Bosideng will lag Dongxiang by one day. Hence, DongxiangÆs retail offering will open on September 25 while Bosideng will open on September 27 (the 26th is a holiday in Hong Kong). The final prices will be set on October 2 and 3, while the trading debuts are scheduled for October 10 and 11, respectively.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media