Roadshows began yesterday (November 14) for a HK$1.39 billion ($178 million) to HK$1.622 billion ($208 million) IPO by Parkson Retail, the Chinese retailing arm of Malaysia's Lion group. The deal represents the first overseas listing by a pure Chinese department store operator and will further broaden investment opportunities in the burgeoning Chinese retail and consumer goods sector.
It also marks a step up in activity by Malaysia's government investment arm Khazanah Nasional Berhad, which is to buy a stake in the company. Fund managers have been told that Khazanah will purchase 9.9% of the company at the IPO price.
This will equate to a purchase price of $59 million to $69 million based on a base deal size of 165.6 billion shares and a price range of HK$8.40 to HK$9.80. It also means Khazanah will account for almost one-third of the IPO, which will have a 30% freefloat pre-shoe. The remaining 70% will be held by Kuala-Lumpur listed Lion Diversified Holdings Berhad.
The base deal comprises two-thirds new shares and one-third old shares. Should the greenshoe be exercised by lead manager BNP Paribas Peregrine proceeds could increase to $239 million at the top end of the range.
The deal is being marketed on a 2005 P/E of 16.7 to 19.7 times and a 2006 P/E of 13 to 16 times. There are a number of comparables, although no direct comps in Hong Kong where the company will trade.
The closest from a sectoral point of view is Shanghai-listed Shanghai Bailian, China's largest retail group, which reported sales of $4.5 billion during the first half of this year. The government-owned department store operator is currently valued at about 30 times 2005 earnings, having traded down 22.3% so far this year.
Internationally, department store groups are trading in the mid-teens. Britain's Marks & Spencer, for example, is currently trading at 15 times 2005 earnings, while French hypermarket chain Carrefour - the largest foreign retail player in China - is trading at 13.5 times.
In Hong Kong there are three sets of comps: the Chinese food retailers, Chinese electrical retailers and branded goods retailers. Chinese food retailers such as Lianhua Supermarket and Wumart are currently trading at respectively 19 times and 30 times 2005 earnings and 15 times and 21 times 2006 earnings.
Chinese electronics retailers such as GOME and China Paradise are trading at 14 times and 19 times 2005 earnings and 11 times and 17 times 2006 earnings. The latter has performed relatively well since its IPO in mid-October, trading up 10%.
What the retail and electronics good retailers share in common is a sector driven by fierce competition for market share and business models characterised by high volume and low margins. GOME, for instance, recently reported a third quarter net margin of just 3.4%, while Wumart is expected to turn in a 4% net margin for the 2005 Financial Year.
By contrast, Parkson is expected to report a 2005 net margin topping 20%.
As such, some specialists believe the company should also be compared to the branded goods companies that supply its stores. These comps include Hong Kong listed stocks such as Giordano and Esprit, which are respectively trading at 15 and 19 times 2005 earnings and 14 times and 16 times 2006 earnings.
Parkson presently has 39 department stores in 26 Chinese cities - it directly owns 23 stores and manages a further 16. Earlier this year it bought 11 of the wholly managed stores for RMB265 million ($32.8 million) and plans to use its IPO proceeds to buy the 16 it does not own outright. About 70% of its sales come from fashion.
Like much of China's retail sector, profit growth is the result of organic expansion and acquisitions. Having recorded 2004 net income of RMB153 million ($19 million) on sales of RMB750 million ($92.8 million), 2005 profit is expected to jump to $34.6 million and 2006 profit to $43.3 million.
The company has said it hopes to have 70 stores by 2008. It is still a minnow compared to domestic operators such as the Bailian group, but it is one of the biggest foreign department store operators in China above Isetan, Printemps and Taiwan's Pacific group.
In the hypermarket sector, Carrefour has about 250 stores across the Mainland and recorded sales of $1.26 billion during the first half of the year, while US Wal-Mart has just under 50 stores and recorded sales of $581 million during the same time period.
Foreign operators still only account for about 10% of total retail sales in China, but are expanding faster than domestic retailers thanks to better access to capital and more efficient supply chain management. Parkson has taken advantage of this by buying up loss-making provincial department stores that had previously been under the management of their respective local governments.
Typically, homegrown department stores have followed one of two models, neither of which tend to be profitable. At one end of the scale are department stores that sell low priced, locally branded goods.
At the other end, are high-end department stores, which have followed the Japanese model of selling space outright to different brands. Under this model, the brands bear the inventory risk and the department store owner resembles a property investor rather than a department store manager.
Because these kinds of stores cede control to their concessionaires, they can no longer dictate the look of each store and the end result can often be chaotic. Parkson has adopted a different approach, whereby it retains control of its suppliers and can mix brands according to demand calibrated by its centralised supply chain management system.
Its expansion plans have also been boosted by China's concessions to WTO. In December 2004, the government lifted virtually all the remaining restrictions on foreign retail operators in China. Previously, the latter had been limited in terms of where they could open stores and the equity stakes they could hold.
Now they are able to start penetrating second and third tier cities, although analysts say it is not yet clear whether the disposable income levels of provincial China will be able to support the rapid expansion planned. This may prove to be one of the main challenges for a sector where growth is largely being driven by the opening new stores rather than increased sales at existing operations.
Department stores such as Parkson also face competition from the hypermarkets at the lower quality end of their branded goods range and from up-market malls at the other end. Alongside its overheating property market, the country has also borne witness to a corresponding rise in mall mania.
The number of malls in China has grown from about 100 in 2002 to more than 400 in 2004. Many are said to have been built with little thought to how they will get filled and at what cost. Later this year, the world's largest mall is scheduled to open in the Pearl River Delta.
At 9.6 million square feet, the South China Mall will be three times bigger than the largest mall in the US - Mall of America in Minneapolis - and will try and lure shoppers with a dazzling array of attractions including a Teletubbies theme park and life-size replica of the Arc De Triomphe.
But Parkson's IPO was also lifted yesterday by news that China's retail sales growth continues to be strong. The Ministry of Commerce reported that retail sales in October hit a record $72 billion, up 12.8% on October 2004.
This followed a corresponding 12.7% increase in September. Clothing sales were up 17% compared to October 2004, while home appliances were up 24%.
Ministry officials have predicted that retail sales will continue to top 12% in 2006, outstripping GDP growth of sub 9%. The government has been keen to promote consumer spending to balance its strong export growth and direct funds away from the overheating sectors such as property.
Parkson's IPO will price on November 23, with listing scheduled for November 30.