Consumer retailers to test IPO market

Philippine supermarket operator Puregold Price Club is aiming to raise at least $177 million, while tea seller Tenfu and restaurant chain Xiao Nan Guo are in the market with slightly smaller deal sizes.

A modest rebound in Asian markets yesterday, when Hong Kong was closed for the mid-autumn festival, and a slightly better tone in European and US markets overnight don’t change the fact that equity markets continue to look weak and vulnerable.

It takes very little these days to spark another sell-off and on Monday shares across Asia tumbled after fears of a Greek default gained pace over the weekend, sparking renewed concerns about a global recession. Companies with operations in Europe suffered the most, but few counters were immune as investors tried to protect their capital.

Even so, a number of Asian listing candidates have decided to go ahead with their planned initial public offerings, hoping that investors will still be keen to buy their stock. And they could be right. The offerings that have started bookbuilding in recent days are primarily in the retail sector or focused on consumer spending — the part of the Asian economy that will be the least affected if Europe and the US were to slip into another recession.

Puregold Price Club, a private sector operator of supermarkets and hypermarkets in the Philippines, went ahead as planned and launched its institutional offering on Friday. And on Monday this week, Chinese restaurant chain Xiao Nan Guo Restaurants Holdings and Chinese tea retailer Tenfu (Cayman) Holdings both kicked off roadshows for their Hong Kong IPOs. They are joining Hongguo International Holdings, a shoemaker and retailer, which started taking orders from institutional investors last Friday.

Together these four companies are aiming to raise at least $524 million over the next week and will be an important test of the investor appetite for market newcomers. Hence, they will be keenly watched by bankers and the bigger issuers in the pipeline.

For sure, many investors will ask for cheaper valuations as they would want to limit the potential downside in case the sell-off in the broader market continues. But for those that have the ability to hold for the long-term, and can tolerate a bit of short-term volatility, this may not be a bad time to invest — assuming they like the fundamentals of the company, of course. For the issuers, the pre-marketing periods will be highly important, not just for establishing the right price level for the current market, but also for securing cornerstone or anchor orders, or for building a shadow book even. To launch a deal without any of that at the moment may be a bit too optimistic.

Puregold Price Club
When Puregold Price Club launched its institutional roadshow in Manila last Friday, the bookrunners already had good visibility on a large portion of the order book and, according to sources, the deal was covered in the afternoon on that first day.

The company has set a price range of Ps12.50 to Ps16.50 per share, which translates into a total deal size between Ps7.5 billion and Ps9.9 billion ($177 million to $234 million). The top end of the price range is slightly below the maximum price of Ps18 per share that the company mentioned in its initial listing application, which is likely a reflection of the continuing market turbulence.

That said, compared to most other stock markets, the Philippines remain relatively stable. The benchmark index fell 1.1% on Monday, but it was still the best performing market in Asia on the day (China, Taiwan and Korea were closed for Mid-autumn celebrations) and it is up 2.3% year-to-date, which is second only to Indonesia.

Puregold’s price range values the company at 11.8 to 15.5 times its projected earnings for 2012, which pitches it at a discount to its closest comparables. Top among them is SM Prime, a conglomerate with a large retail component. In fact, it is the largest operator of supermarkets and hypermarkets in the Philippines ahead of Puregold. However, it also has other businesses such as malls, hotels, property and banking that are embedded in the valuations. As of Monday, SM Prime was trading at a 2012 price-to-earnings multiple of 17.3 times. Another comp is fast-food chain Jollibee Foods Corp, which trades at 24 times. At the low end is branded consumer food group Robina Universal, which makes most of its earnings from the sale of snack foods. It is trading at a P/E of 11.3 times for the fiscal year to September 2012.

Puregold is aiming to open 28 new stores in the final five months this year in Manila and across the main island of Luzon, which will add to its current 72 stores (46 hypermarkets, 19 supermarkets and seven smaller stores referred to as discounters). It also intends to open 12 stores each in the regions of Visayas and Mindanao by the end of 2013, two areas that it believes are underserved in terms of large-scale supermarkets.

Despite the rapid expansion since the company opened its first store in 1998, analysts argue that there is still a lot of growth potential since the Philippines has one of the lowest penetration rates in Asia when it comes to modern store formats. According to research firm Planet Retail, about 70% of the food retail market is still served by traditional mom and pop shops and markets and it estimates that hypermarkets and supermarkets will be among the fastest growing retail formats in the food retail sector in 2010 to 2012, with compound annual growth rates of 28.3% and 27.1% respectively.

But Puregold is tapping into the traditional retail sector as well, by selling to local resellers, including small stores, local eateries, bakeries and other bulk quantity buyers. It claims to be the only supermarket or hypermarket operator in the country to strategically target resellers and has even created a loyalty programme for these customers that has grown from 30,000 members in January 2005 to more than 170,000 members now.

The growth is feeding into earnings, with a 21% increase in revenues last year to Ps29.1 billion ($669 million) and a 288% jump in net profit to Ps510.4 million. In the first six months this year, the company made a profit of Ps782.8 million.

As reported earlier, Puregold is selling 30% of its share capital in the form of 600 million shares, of which 500 million are new. There is also a greenshoe of an additional 90 million shares, which are all secondary. Of the total, 70% will be targeted at international investors, while the remaining 30% will be split between domestic institutions and retail investors.

The deal is scheduled to price after the close of US trading on September 20 and the trading debut is planned for October 5. HSBC and UBS are joint bookrunners for the IPO and BDO Capital & Investment Corp and First Metro Corp are acting as domestic lead underwriters.

Founded by Taiwanese businessman Lee Rie-Ho in 1993, Tenfu is the biggest retailer of branded tea leaves in China and also sells tea snacks and tea ware. It doesn’t grow its own tea, however, since Taiwanese residents are not allowed to invest in companies involved in planting, manufacturing or blending of tea leaves in mainland China.

Tenfu is aiming to raise between HK$1 billion and HK$1.43 billion ($128 million to $182 million) by selling 208.62 million new shares, or 17% of its share capital.

It has set a price range of HK$4.80 to HK$6.80, which translates into a 2011 P/E ratio of 16.6 to 23.5 times. The closest comps are deemed to be other food producers such as noodle maker Tingyi, which trades at 33.1 times, or snack food manufacturer Want Want, which is valued at 30 times this year’s earnings — both are significantly larger than Tenfu, however. Analysts are also referring to shoe manufacturer and retailer Belle, because of its similarly strong brand name. Belle is currently trading at a 2011 P/E of 21.8 times.

While the deal is quite small, Tenfu has secured a cornerstone investor, General Atlantic, which will buy approximately 73 million shares, or 35% of the total deal. On top of that, the bookrunners were said to have had a good shadow book in place at launch, meaning a number of investors had agreed to invest a certain amount in the IPO. While such investors have the option to back out — it isn’t a binding commitment — typically they will not do that since it may make it more difficult for them to get shares next time.

The deal is scheduled to price after the close of US trading on September 20 and the trading debut is set for September 26. China International Capital Corp (CICC), Credit Suisse and Polaris Securities are joint bookrunners.

Xiao Nan Guo Restaurants
The smallest of the four companies currently in the market is Xiao Nan Guo, which is aiming to raise between HK$552.8 million and HK$737 million ($71 million to $95 million).

The company is operating full-service restaurants in mainland China and Hong Kong that are targeted at the mid- to high-end segment of the market. Most of its restaurants (47 of them) are under the brand Shanghai Xiao Nan Guo, which serves Shanghainese-inspired food, but it also has four outlets under the name of Maison De L’Hui and is planning to launch a third chain in Hong Kong by the end of this year under the name of “the dining room”.

In total, the company is planning to open 22 new restaurants this year, 26 next year and 33 in 2013, both by increasing the penetration in its existing markets and by expanding into new ones.

It is offering 335 million shares, or 25% of its share capital, at a price between HK$1.65 and HK$2.20 apiece. The price range translates into a 2012 P/E ratio of 11 to 15 times. This will pitch it at a discount to its closest comp, Little Sheep, which trades at 18.4 times. However, the latter is in the process of being bought by US-based Yum Brands, which means its share price includes an M&A premium as well. Japanese-style noodle chain Ajisan is currently trading at 17.8 times after coming under pressure due to questions about the quality of some of its food.

Despite its small size, the deal drew about 170 investors to a lunch briefing in Hong Kong on Monday and like Puregold, sources said Xiao Nan Guo was covered after the first day.

The IPO is led by Bank of America Merrill Lynch and Standard Chartered. The final price will be determined on September 20 and the listing is scheduled for September 28.

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