Going, going Gome

China''s largest electrical appliances chain finally completes share divestment.

Hong Kong listed Gome Electrical Appliances raised HK$1.194 billion ($153 million) yesterday (September 27) after selling 300 million shares at HK$3.98 per share.

This represented the company's second attempt to access the equity markets after a botched offering in July, which was not completed even after it was slashed in size and price. This time round the same lead manager ABN AMRO bought and hard underwrote the entire deal over the weekend.

A 240 million accelerated share offer was then marketed the following business day at HK$3.90 to HK$3.98 before being upsized to 300 million shares and priced at the top of the range. This represents a 15% discount to the stock's HK$4.70 close when it was suspended.

The order book is said to have closed two-and-a-half times covered, with participation by 50 accounts. By geography 50% came from Asia, 35% from Europe and 15% from the US.

When the group first came to market in July it initially tried to sell 575 million shares at HK$4.85 to HK$6.53. This was then scaled back to 400 million shares on a range of HK$4.05 to HK$4.85.

Specialists say the original deal failed for two main reasons. Firstly investors did not like the complicated backdoor listing, which preceded the transaction and secondly it was too expensive.

At the top end of the original range, the deal was pitched at over 20 times 2004 earnings at a time when Chinese consumer plays were coming under selling pressure. Since then the market has settled and the issuer has become far more realistic in its expectations.

The current deal has been sold at 15 times 2004 earnings and 12 times forward earnings according to ABN research estimates. This would put it in line with other recently listed consumer plays such as Mengniu Milk.

The company needed to do a deal because Gome no longer met the stock exchange's minimum freefloat requirements. The Gome assets were injected into a vehicle also owned by the same group called China Eagle. In return, China Eagle paid for the assets with a combination of stock and convertibles that took the controlling shareholder Wong Yu Kwong up to 96%.

The new deal represents 14% of the enlarged share capital, but specialists say the freefloat is back to 75% as the market capitalization has quadrupled. This is because for every share sold, Wong converted three times as many shares adding a further $600 million to the market capitalization, which now stands around the $850 million mark.

Future earnings growth may come from further asset injections. At the time of the backdoor listing the company could only buy 65% of Gome, because this is the upper limit a red chip stock is currently allowed to own of a domestic consumer play. This restriction is expected to be lifted by the end of this year or in early 2005.

The 94 stores chosen had a net asset value of Rmb241 million and span most of China's major cities. The main exception is Shanghai where the group has 11 stores.

However, specialists say the Shanghai stores are currently loss making because retail competition in the city is so fierce. "The company is currently trying to build market share in Shanghai and it thinks it would be better to do this out of the spotlight," says one specialist.

In the first quarter of 2004, Gome recorded a net profit of Rmb130 million and a net margin of 4.5% versus respective figures of Rmb39 million and 1.9% over the same period the previous year.

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