Golden Eagle hopes IPO will soar like Parkson

Mainland department store launches institutional tranche of Hong Kong IPO.
Mainland department store operator Golden Eagle Retail Group will be hoping to replicate the success of its larger rival Parkson Retail when it launches the institutional portion of its $144 million to $182 million IPO today (February 27).

Parkson has seen its share price soar 96% since it started trading on November 30 last year, driven by acquisition news and strong investor demand for mainland consumer concept stocks. It now trades at about 40 times its forecast 2005 earnings and 29 times 2006 earnings.

Golden Eagle Retail, a spin-off from a private conglomerate founded by Chinese American entrepreneur Roger Wang, will be less demanding and has set a price range that will value the company at 17 to 21 times 2006 earnings based on the consensus profit forecast from joint global coordinators ABN AMRO Rothschild and Goldbond.

The company is offering 450 million shares at a price of HK$2.50 to HK$3.15 each, with a 15% greenshoe that could increase the total deal size to HK$1.63 billion ($208 million). The there is the usual split with 10% of the offer earmarked for local retail investors and the rest available to institutional investors.

Less common is the fact that 75% of the base deal size, or 337.5 million shares, will be secondary shares provided by Wang, who acts as both chairman and CEO of the listing candidate. The remaining 25% will be new shares. However, Wang will use $85 million of the proceeds from his share sale to repay a loan given to him by the company, and Golden Eagle Retail is estimating to reap total net proceeds of about $125 million from the deal.

That amount is almost exactly what the company will need to carry out its current expansion plan. According to investors who have received information on the company during pre-marketing, Golden Eagle plans to open its first store in Xian and a second store in Nanjing in the fourth quarter.

It is also aiming to open a new store in Taizhou in the first half of 2007. It currently has five department stores with a total retail space of 100,000 square metres.

Still, analysts note that the company is quite conservative when it comes to expanding its retail space and is focusing primarily on organic growth û even though it has said it would be interested in acquisitions if the price is right.

By contrast, Parkson acquired 12 new stores last year, which contributed a combined 10.4% of its 2005 profit, and said it would spend part of its IPO proceeds to buy another 10 to 14 department stores. It currently has 23 stores, spread over 26 cities, and more than 400,000 square meters of retail space.

Golden Eagle Retail has an edge over its larger competitor, however, in that it has a higher revenue per square foot and net profit margins of about 30%, compared with ParksonÆs 22.5%.

One reason for this is that Golden EagleÆs businesses are located in the affluent areas around its hometown of Nanjing, which has allowed it to concentrate on high-end department stores. It also derives close to 90% of its revenues from concessions, which means it rents out floor space in the department stores to retailers who will also pay a portion of their profits to Golden Eagle on top of the rent.

This is a business model that was popularized in Japan and is less common in the West. As some analysts point out, the downside is that Golden Eagle has less inventory control and involvement in the overall look of its stores. The end result can sometimes appear chaotic.

In 2005, Golden Eagle is expected to report a 57% increase in revenues to Rmb7.58 billion, while net profit is estimated at Rmb227 million. In 2006, analysts expect the bottom line to improve by 21% to about Rmb275 million.

One concern for investors will be the fact that about 55% of revenues come from the companyÆs flagship store in Nanjing, although the management will argue that this is largely to do with the fact this store has been open the longest. As a result, management has had more time to figure out the right product mix and the store currently generates net margins above the group average.

It takes about 12-24 months to work out the best layout for a new store and as the groupÆs other stores come of age, their revenue contributions should increase as a portion of the total, analysts say.

The companyÆs loans to its chairman are also likely to come under scrutiny as they once again highlight that good corporate governance is not yet a given for private entrepreneurs in China. The fact that Wang is attempting to clean up the books in connection with the listing will be welcome by international investors, but the possibility of similar practices happening again is likely to hang over the company until it has had a chance to prove itself.

One potential investor shrugged off the issue, however, saying:

ôIt is not good practice, but nobody will care. When people assess Chinese stocks accounting practises arenÆt taken that seriously, it is much more important where the company ranks within the industry, how important the industry is and who their customers are.ö

Also, the consumer concept sector in China is hot at the moment and this is only the second department store operator to list offshore.

ôThere isnÆt a whole lot of paper out there, which is one reason why ParksonÆs share price has shot up so much. Retail is a sector everybody wants to be a part of and there simply arenÆt enough shares to go around,ö one observer said.

The rapid economic growth and wealth expansion in China are obvious reasons behind such optimism. Reforms within the mainland retail industry, including the opening up of the sector to foreign investment, has led to an array of imported goods now being available in local stores and has help boost total retail sales of consumer goods from Rmb1.6 trillion in 1994 to Rmb5.4 trillion in 2004. That represents a compound annual growth rate of 12.7%, which is higher than the 11.3% CAGR in GDP during the same period.

More specifically, research firm Euromonitor projects that the total value of the Chinese department store market will reach Rmb850 billion by 2008 ($102.5 billion), which will represent a 76% increase over 2003.

Parkson, which raised HK$1.62 billion ($207.7 million) from its IPO, came to market at HK$9.80, which translated into a 2005 P/E of about 23 times. Last Friday it closed at HK$19.30, giving it a market cap of about HK$10.6 billion ($1.35 billion). Based on its price range, Golden Eagle will have a market cap between HK$4.5 billion and HK$5.67 billion.

Golden Eagle International Group is also active within real estate, automobile marketing and sales, software, medicine and other investments.

The IPO will stay open until March 13, when the price is also expected to be fixed. The shares are scheduled to start trading on Hong KongÆs main board on March 21.

¬ Haymarket Media Limited. All rights reserved.
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