With a price range of HK$3.80 to HK$5.80, this will give a base deal size between HK$1.89 billion and HK$2.88 billion ($242 million to $369 million). A 15% greenshoe could lift the total proceeds to as much as $424 million. Initially, the company had planned to sell only new shares, but the owner, KoreaÆs ELand World Group, was unwilling to see that much dilution now that the free-float is to be a quarter of the company and decided to include some of its own shares in the sale. As a result, only 60% of the 496.3 million shares on offer pre-shoe are primary shares, while the remainder is secondary shares sold by ELand. The greenshoe is made up of secondary shares only.
The portion of shares on offer was increased since current market valuations would have made it difficult to meet the market cap threshold of HK$10 billion that is normally required to get a waiver to sell less than 25% of the share capital. Indeed, if the deal is priced at the bottom of the range, E-Land will have a market cap of only HK$7.6 billion at the time of listing. However, a source familiar with the deal also noted that investors were not very keen to commit to a deal with a free-float right around the threshold as the stock would likely be quite illiquid.
That issue resolved, investors are now free to focus on other issues such as E-LandÆs strong growth rates and plans for a rapid ramp-up of sales. The company doesnÆt operate any retail stores of its own, but sells its designs through department store concessions. At the end of last year it had close to 1,100 such concessions spanning more than 100 cities and 29 provinces, and according to a syndicate research report, it is planning to open another 1,200 over the next three to four years. Coupled with healthy same-store sales growth, improving margins on newer brands and a lower effective tax rate, this should allow the company to grow its net profit at a compound annual growth rate of 49% in 2007-2010, the same report projects.
Other sales arguments include: the companyÆs multi-brand strategy (it currently manages a portfolio of seven womenÆs brands targeted at mid- to high-income female consumers of different age groups); its positioning in both tier-1 and tier-2 cities; and its ability to capture market share. And of course its cheaper valuation compared with other players in the same sector.
The price range values E-Land at about 15 to 23 times this yearÆs earnings, which implies a valuation discount of between 11% and 40% versus Hong Kong-listed womenÆs fashion designer Ports Design. The latter has had a strong run recently with a gain of 22% over the past seven sessions and currently trades at a 2008 price-to-earnings multiple of about 26 times.
Analysts regard Ports as the key comparable, and note that E-Land is currently going through the same rapid expansion phase as Ports did a couple of years ago. The two companies focus on the same segment of the market and Ports also generates some of its sales from department store concessions. However, the latter does operate some stores of its own and is also a better-known brand in the international market, which should warrant a valuation premium, analysts say.
Some investors also look at shoe manufacturer and retailer Belle International in its capacity as manager of several different self-designed brands. It too is currently trading at a forward P/E ratio of about 26 times.
E-Land started its marketing roadshow in Korea yesterday with the aim of attracting some of the domestic funds with mandates to invest overseas to the deal. Obviously the bookrunners are trying to tap into the fact that the parent company, ELand World Group, is a well-known business group in Korea where it is involved in a diverse range of businesses that, aside from the design, manufacturing and sales of clothing, also include advertising, construction, real estate, hotels, supermarkets, software development and e-commerce among other things. According to a source, there was a lot of interest among these funds to meet the management, although it remains to be seen whether this interest will translate into actual orders.
The roadshow continues in Hong Kong today and tomorrow and then on to Singapore at the beginning of next week, followed by trips to London and the US. The Hong Kong public offering will launch on May 2 and the entire deal is scheduled to close and price on May 7. The trading debut is set for May 16. Citi, Goldman Sachs and UBS are joint bookrunners.
As usual, 10% of the deal will be set aside for retail investors, but standard clawback triggers apply.
The offering comes on the heels of Maoye Department StoreÆs re-launched IPO, which is due to close today. The department store operator, which initially tried to list in January, is aiming to raise between $320 million and $420 million by selling 16.9% of its share capital and, according to sources, the deal was covered as of Tuesday this week. This should be encouraging for E-Land, given that both deals are consumption related.
Maoye, which is brought to market by Goldman Sachs, HSBC, JPMorgan and UBS, became the first company to launch an IPO in Hong Kong in the second quarter when it kicked off both its institutional and retail offerings on Monday. E-Land too was supposed to launch its institutional offering on Monday, but had to delay it by a couple of days while adjusting the listing documentation for the size increase to 25%.