Goodbaby China broke the equity capital markets silence on Tuesday by launching Hong Kong's first initial public offering in almost two weeks.
Braving choppy market conditions, the Chinese maternity, baby, and children's products seller hopes to raise as much as HK$1.25 billion ($161 million) by wooing investors with a positive tale of growth.
With global stock markets faring poorly as fears of an economic slowdown gather steam amid a slump in oil prices, conditions are hardly favourable for primary share sales, not least in Hong Kong and mainland China. The Hang Seng index fell another 2.5% on Tuesday, extending its losses so far in 2016 to almost 14% as shares in Shanghai and Shenzhen tumbled another 6.5% to 7%.
But bankers familiar with the transaction hope the underlying quality of Goodbaby China plus an appealing valuation will help to counter sluggish market sentiment and support the IPO.
Goodbaby China is scheduled to take orders until February 2 and aims to list on February 12, the second day after the Chinese New Year break. It is the first IPO in Hong Kong for which marketing has begun within the 2016 calendar year and would be the first since Virscend Education listed on January 13.
Indicative deal terms include the sale of 333.3 million shares at a price range of HK$2.68 to HK$3.76 per share. The company is selling 25% of its enlarged share capital through the IPO with an option to increase the deal size by 15% depending on subscription levels.
Based on these terms Goodbaby China could raise between $115 million to $161 million on a pre-shoe basis and up to $185 million if the upsize option is fully exercised.
By Hong Kong standards that is not a large trade; the territory was the world's largest IPO fundraising hub last year, raising a total of $33.7 billion. So Goodbaby China's offering is less likely to be undermined by broader market sentiment, assuming the company and its representatives can pitch a good equity story during the bookbuilding process.
Initial readings are encouraging. Goodbaby China, which is China’s largest multi-channel retailer of children’s products, according to its prospectus, ticks some of the hottest investment boxes in China as it stands to benefit from China's new two-child policy, increased consumption, and the boom in e-commerce.
Goodbaby China sells maternity, baby, and children’s products both under its own brands and third-party brands. It operates in the downstream of the value chain and is independent to Goodbaby International, the Hong Kong-listed manufacturer of children’s products.
The company was formed through a spinoff from Goodbaby International in 2010.
Moving online
Like other consumer retailers, Goodbaby China is in the midst of transforming into an online and offline retailer through the introduction of internet and mobile sales platforms.
It appears to have executed the transformation well with a significant portion of its growing sales shifting to online platforms.
According to the company’s prospectus, online sales as a percentage of revenue grew from 5.2% in 2012 to 22.4% in the first 10 months of last year. During this same period, Goodbaby China's revenue and net profit grew at a compound annual growth rate of 11.75% and 14.5%, respectively.
One of the company’s strengths is the extensive strategic partnerships it has entered into with international brands like Nike, Adidas, Reebok, and Puma. Sales of third-party brand products have become a key sales component for the company, accounting for around 35% to 40% of its total revenue in the last four years.
Goodbaby China’s multi-channel retail sales model and its focus on children’s products make it difficult to benchmark against individual listed companies. So for comparison purposes, syndicate analysts are using a basket that comprises Chinese offline retailers Anta Sports and Cosmo Lady and online retailer Jumei International.
One source familiar with the matter told FinanceAsia that the indicative price range for Goodbaby China’s IPO equates to about 9.5 times to 13.3 times estimated 2016 earnings, based on the syndicate consensus. That is a significant discount to the trio of reference companies, which are much bigger in terms of their market capitalisation but trade at around 18 times forecast 2016 earnings.
The company intends to continue expanding both online and offline sales model, with the proceeds of the IPO allocated fairly evenly between the two.
Approximately 30% of the proceeds will be deployed for expanding self-operated stores, while another 25% will be used for potential acquisitions of new businesses and technologies. The company also plans to use 22% of the proceeds to improve its supply chain management and IT infrastructure, according to its prospectus.
Morgan Stanley is the sole sponsor of the IPO and also a joint bookrunner with BOC International.
