Investors are watching with interest the ongoing IPO of Li & Fung subsidiary Convenience Retail Asia, which operates the Hong Kong convenience store chain, Circle K. The offering, on Hong Kong's growth enterprise market (GEM), looks to be a bargain, according to BNP Paribas Peregrine (BNP) director Darius Yuen. The offer price range of between HK$1.05 ($0.13) and HK$1.15, representing a price-earnings (PE) ratio of 13.09 to 14.13, is "cheap" compared with other listed convenience stores around the region.
"We disagree that Circle K should be seen as a Hong Kong retail stock," says Yuen. Instead, he says that Circle K is comparable with convenience chains such as the President Stores in Korea which is trading with a PE ratio of 27 times, and Lawsons in Japan which is trading at 28 times. Yuen observes that listed Hong Kong retailers such as Giordano are only trading with a PE ratio of 11. "The outlook for retail plays is not as promising, as margins for such retailers are being cutàwhereas people will pay for convenience. Convenience stores are selling convenience."
There are many internal reasons for Circle K to list. "This is a great way to give incentives to staff," says Yuen. Circle K has over 100 stores and employs over 2000 people in Asia. Furthermore, he says that an IPO would only serve to enhance the brand name of the convenience chain. And Yuen believes that GEM is the place to do it, despite the poor performance of most IPOs on the board since its inception. "This is a real growth story," Yuen enthuses. The convenience chain is somewhat of a turnaround story, incurring losses from its establishment in 1985 up until 1999, when first profits were recorded, and in 2000 the chain posted a HK$45 million profit.
There is good reason why Yuen is enthusiastic about the IPO, as the global co-coordinator and sponsor BNP is hoping to improve its deal performance with the listing of a subsidiary of a premier company such as Li & Fung. In 2000, BNP's GEM IPOs lost approximately $183 million in value, according to figures compiled by FinanceAsia.
The Li & Fung-owned retail chain plans to raise HK$159.6 million by placing 80% of the 163.9 million shares on offer to qualifying institutional buyers around the world, and the remaining 20% to the public. The initial price offering (IPO) has already begun and will close on Friday. Shares will begin trading on 18 January.