Honma tees off Hong Kong golf IPO

China's fluctuating relationship with the game of golf tested by the flotation of upmarket equipment manufacturer.
A game invented by the Scots?
A game invented by the Scots?

China's fluctuating relationship with the game of golf is being put to the test following the launch of a flotation by upmarket equipment manufacturer, Honma Golf.

The company opened book building for an HK$1.134 billion to HK$1.471 billion ($146 million to $190 million) offering on Monday that has been valued at 14.5 to 18.5 times forecast December 2017 earnings.

Sector specialists said the deal was already two times covered by the end of the first day of bookbuilding with price sensitivity towards the mid to upper end of the price range. 

Following its prospective Hong Kong Stock Exchange listing, Honma will represent one of only two listed golf equipment manufacturers globally alongside New York Stock Exchange listed Callaway Golf.

Honma’s unique selling point is its Asian focus. The Japanese-based company is now Chinese-owned after Shanghai-based tycoon Liu Jianguo purchased Honma from its former private equity owners in 2010.

Since then, he has pushed sales on the mainland where the company’s premium branding and Japanese manufacturing expertise play well with high-end consumers.

"Honma was once like the Aston Martin of golf," said one banker "Under its new owners it has moved a bit more into the middle ground so it's now more of Porsche and truly an up-and-coming Asian star."

According to its prospectus, Japan still accounts for just over half of Honma’s revenues and under its new ownership the company believes it can push back its market share from 9% in 2015 to the mid-teens level it once occupied.

But it is China and to a lesser extent, Korea, which has been the main growth driver over the past three years. China's market share has risen from 12% of sales in 2014 to 18.7% in the year ending March 2016, while Korea stands at 12.6%.

As such, one big focus for investors will be the potential sales impact of the Communist Party's recent pronouncements concerning golf membership for its 89 million members. 

Last October, the government banned golf membership as part of President Xi Jinping's anti-corruption campaign. However, this spring it appeared to backtrack after an article by the Central Commission for Disciplinary Inspection concluded: "There is no right or wrong about playing golf as it's just a sport."

Analysts report that officials can now re-join golf clubs as long as they use their own salaries to pay for membership rather than use public funds, or accept VIP cards as gifts.  

In his book “The Forbidden Game: Golf and the Chinese Dream” author Dan Washburn outlines the Chinese government’s longstanding and often contradictory attitude to golf: a game historians now believe the country invented during the Song dynasty in the late tenth century (rather than by the Scots three centuries later as previously thought).

Since 2004, the government has banned the construction of new golf courses on environmental grounds. But growing demand from the fast-expanding middle class has spurred the continued development of illegal ones, with estimates of overall golf courses ranging from 500 to 1,000.

Research firm, Frost & Sullivan, forecasts that China will provide the fastest global growth market for golf equipment manufacturers through to 2019. It predicts that sales will rise by a compound annual rate of 8.3% compared to 2.3% in the US and 2% in Japan.

This is partly government-directed since it is pushing sport through its current five-year plan, targeting Rmb3 trillion ($450 billion) of sports industry revenue by 2020. A female Chinese golfer, Shanshan Feng, also recently won a bronze medal in the Rio Olympic games and is sponsored by Honma, which hopes the forthcoming Tokyo Games in 2020 will give sales a new uplift over the coming four years.   

Going global

In the termsheet for its initial public offering, Honma says it plans to use more than half of its IPO proceeds for business expansion and acquisitions, particularly in the US and Europe.

These going global ambitions are likely to be a second focus for prospective investors, who will be keen to see whether the company can develop a more global presence and segmented portfolio of brands.

Over the past year, one key industry trend has been a retrenchment by big name apparel manufacturers, which have shut down or tried to sell their equipment manufacturing divisions and retreat back to their core expertise.

Earlier this year, for example, Germany's Adidas put its golf equipment assets up for sale. These assets include TaylorMade, which has the world’s leading market share in golf drivers, plus two smaller companies: premium-equipment manufacturer Adams Golf, and Ashworth, which sells golf apparel.

Three months after Adidas said it was pulling out of golf equipment manufacturing, Nike also announced its intention to shut down its golf manufacturing business in early August.

Analysts believe industry consolidation will benefit specialist equipment manufacturers such as Honma and Callaway, which will be able to increase their market share.

They also forecast it will enable them to overcome a major headwind resulting from declining participation rates in developed markets such as the US, where the number of golf players has been dropping for more than a decade. Balancing this is an industry rebound in the number of games played by existing players, which has underpinned recent sales growth.

At the end of July, for instance, Callaway reported second quarter net income of $34.1 million on sales of $245.6 million compared to $12.8 million and $230.5 million one year earlier.

The California-based company has said it is not interested in bidding for TaylorMade. Some analysts believe Honma may be a suitor.

Callaway provides the closest comparable for Honma and has had a strong run so far in 2016.

Year-to-date, the stock is up 21.34% and 33.29% over a one-year period. At Monday's close, it was trading on a consensus trailing 12 month P/E multiple of 56.26 times (ttm) according to Bloomberg and a forward multiple of 26.21 times. On a 2017 basis, it is trading at around 28 times.

Honma is being pitched on a ttm multiple of 20 to 25.9 times earnings based on net profits of $33.2 million for the financial year ended March 2016. On a 2016 calendar basis it is being pitched at 18 to 23.5 times and at 14.5 to 18.5 times on an end 2017 calendar basis.

Asian comparables are few and far between. Japanese sports equipment manufacturers such as Yonex and Mizuno are trading at much higher multiples.

The former is currently valued at 38.15 times ttm and 33.13 times on a forward basis according to Bloomberg, while the latter trades at 98.69 times and 24.39 times respectively.

In China, sports shoes and apparel manufacturers such as Li Ning, Anta and X-tep range from the high teens on a ttm basis to over 56 times in the case of Li Ning and a low to mid twenties range on a forward basis.

"Honma is coming at a substantial discount to other best in class brands listed in Hong Kong," said one specialist. "But the company has an acquisition strategy and it wants investors on its side over the longer term. This is a true institutional deal unlike many Hong Kong IPO's these days."

Deal structure

Honma is offering 133.991 million primary shares pre-greenshoe for its IPO, with the standard 90%/10% split.

The price range is being marketed on a range of HK$8.46 to HK$10.98 per share, equating to 22% of the company's enlarged share capital pre-greenshoe.

The greenshoe also consists of primary shares.

Earlier this year, the group sold a 7.5% stake to Fosun International, which is subject to a six-month IPO lock-up. The controlling shareholder is also under a 12-month lock-up

Bookbuilding will close on September 28th with listing scheduled for October 6th.

Sole sponsor is Morgan Stanley with Nomura as joint bookrunner.

The US and Japanese investment banks are also acting as bookrunners for a second golf-related IPO for golf ball manufacturer Titlelist, which is owned by Fila Korea and a consortium including Mirae Asset Management and Woori Private Equity.

In mid-June, parent company, Acushnet filed a US IPO application for a deal, which may raise $200 million to $300 million according to US-based analysts.

This story has been updated since first publication with forward valuation multiples.

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