Dr Frog IPO receives strong demand on day one

The retailer of children's clothes – Boshiwa in Chinese – is supported by the participation of three well-known cornerstone investors as it aims to raise up to $320 million from a Hong Kong listing.

Yet another cash-thirsty consumer company has joined the line-up of listing hopefuls in Hong Kong, making the most of the increasingly hot theme of Chinese private consumption. Boshiwa International, one of the largest retailers of children’s products in China, started bookbuilding yesterday for an initial public offering of up to HK$2.49 billion ($320 million).

The Shanghai-based company designs, makes and sells children’s clothes, footwear and accessories under its own brand Boshiwa, which literally means Doctor Frog in Chinese, as well as licensed brands, including Harry Potter, Bob the Builder and Thomas and Friends, which are popular in China.

The offering is said to have received strong demand from institutional investors on the first day of a week-long roadshow, partly helped by the fact that the company has secured three well-known cornerstone investors who will buy up to 30% of the deal. The Government of Singapore Investment Corp, Mirae Asset Management and investment management company Martin Currie have agreed to subscribe to $30 million, $25 million and $20 million worth of shares in the offering, respectively.

“We have seen a large number of orders placed today,” a source said. “The participation of famous cornerstone investors has sent a strong message.”

The company is offering 25% of its share capital, or 500 million shares, all new, at a price between HK$3.88 and HK$4.98. This indicates it will raise between $250 million and $320 million. The deal size could stretch to as much as $368 million if a 15% greenshoe option is exercised in full, allowing the company to sell an additional 75 million shares.

The indicated price range represents a price-to-earnings (P/E) ratio of 14.9 to19.1 times pre-shoe, based on forecast earnings for 2011. This suggests a discount versus other branded Chinese consumer plays focusing on the domestic market, such as including shoe retailer Belle, sportswear chain Li Ning and down jacket designer Bosideng International. As a group, domestic retailers are trading at an average P/E ratio of 19.5 times, based on next year's projected earnings.

Boshiwa made a net profit of Rmb129.4 million ($19 million) in 2009, the company said in a preliminary IPO prospectus.

Ten percent of Boshiwa's shares are earmarked for retail investors, while the remainder will be offered to institutional investors, subject to normal clawback triggers. The order book will close on September 21, with the final price set to be fixed later that same day. The Hong Kong trading debut is scheduled for September 29.

The deal is managed by BoCom International, Credit Suisse, Deutsche Bank and UBS.

Boshiwa plans to use 40% of the proceeds to expand is retail outlet network and the rest to promote its brands, establish a research and development centre for children’s apparel and to settle debt.

There are currently several Chinese retailers in the market offering new shares and competing for investor demand. Besunyen, a Chinese diet tea maker, also started bookbuilding yesterday for an IPO that will allow it to raise as much as $194 million if the greenshoe option is fully exercised.

J.P. Morgan has predicted that Hong Kong-listed Chinese consumer plays will remain resilient and outperform the broader market in the coming months or even years.

These companies will be helped by China's increasing wages and rapid urbanisation that allow hinterland residents to take part in the shopping frenzy enjoyed by their counterparts in coastal areas, the US bank explained. Companies that operate in the staple or low- to mid-end consumer segment are especially attractive bets, it said.

Per capita disposable income of urban households in China grew from Rmb6,280 in 2000 to Rmb17,327 last year, according to data from the National Bureau of Statistics of China.

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