Maoye relaunches IPO at half original size

The department store operator is the first company to attempt a Hong Kong IPO in the second quarter, but is expected to be followed shortly by women's fashion designer E-Land.
Maoye Department Store will be the first company to launch an initial public offering in Hong Kong in the second quarter when it kicks off both its institutional roadshow and retail offering today. The department store operator, which initially planned to list in January, is no doubt hoping that the slight improvement in market sentiment in recent weeks will give it a tailwind and allow it to raise the capital it needs to expand.

However, the company is also coming to market with a significantly smaller deal as valuations have come down. It will also be selling only 16.9% of its share capital compared with 25% last time. According to sources, the price range has been set at HK$2.90 to HK$3.80, which will give a base deal size of HK$2.5 billion to HK$3.28 billion ($320 million to $420 million). This is about 54% less than the $697 million to $905 million that it tried to raise in January.

Maoye withdrew its January offering just before pricing amid volatile market conditions that also forced another three Hong Kong IPOs to be pulled during the course of one week. It was unclear whether MaoyeÆs order book was sufficiently covered at the bottom of the price range, although market talk at the time suggested that the deal could have been completed had the issuer agreed to price at the low end. However, issuers were generally concerned that they would have had to face a very difficult aftermarket had they gone ahead and with their listings, and believed they may be better off returning when the markets had stabilised.

One of these companies, Solargiga Energy, has already returned to the market, relaunching its IPO in March. It successfully completed a scaled-down offering at a fixed price that allowed it to raise $127 million.

With only six companies able to complete an IPO in Hong Kong in the first quarter and a combined issuance volume of only $3.9 billion (of which China Railway Construction Co accounted for $2.3 billion) it is extremely important for the market that MaoyeÆs IPO goes well. Of the six IPOs seen so far, only CRCC and Solargiga are currently trading above the issue price (Solargiga is only 1 HK cent above). The rest are well below their IPO prices, which obviously doesnÆt help in terms of convincing investors to take a bet on other newcomers.

Bankers say the gap between what issuers want and what investors are willing to pay has narrowed, however, and note that most issuers realise that they will have to compromise on valuations if they want to ensure a listing at the present time. But they (the bankers) are also keenly aware that the current window of opportunity can shut rather quickly if another IPO were to struggle.

To help improve its chances of success, Maoye has enlisted three more investment banks alongside Goldman Sachs which was the sole bookrunner last time around. HSBC and UBS have been brought in as joint global coordinators and bookrunners together with Goldman, while JPMorgan is included as a joint bookrunner.

According to one source, the department store operator is also offering its shares at a much more modest valuation of 19.7 to 25.8 times its 2008 earnings, based on average syndicate estimates. This compares with valuation range of 29 to 37.7 times in January. However, the comps have seen their share prices and valuation multiples drop since then as well. Sector leader Parkson Retail Group has been one of the hardest hit, partly because of a combined placement and convertible bond by Malaysian investment company Khazanah that put pressure on the share price. The placement raised $96.8 million and the CB a further $550 million. Since Maoye pulled its deal on January 27, ParksonÆs share price has fallen 7% and its 2008 P/E multiple has dropped to 35 from 38. At the beginning of the January roadshow, Parkson was trading at a P/E multiple of 45.

Meanwhile, New World Department Store ChinaÆs fiscal year 2008 P/E has fallen to 31 times. (The company has a fiscal year that ends in June and its fiscal 2009 P/E is at 23 times.) Smaller regional player Golden Eagle Retail Group, which many observers say should be closest to Maoye in terms of valuation, is currently trading at about 27 times this yearÆs earnings.

While the new price range pitches Maoye at a discount to the comps even at the top end of the range, the margin at the upper end is not that wide and another setback for New World or Golden Eagle could quickly erase that advantage. Some investors had also indicated during last weekÆs pre-marketing that they preferred Maoye to come at a PE range in the high teens.

Analysts have been telling investors that the company met its forecast for about 90% net profit growth in 2007 and that the first half 2008 forecast, which will be included in the listing document, will again suggest significant growth. The company has also completed the acquisition of another a piece of land in Shenzhen that it will use to develop a new department store.

Maoye currently has 15 department stores targeted at medium to high end consumers and plans to add another seven stores over the next two years through organic growth. Five of those will be in the southern, south-western and eastern parts of China where its existing stores are also located. The other two will be set up in the Liaoning province and will mark MaoyeÆs first move into north-eastern China.

The company has a leading market position in four special economic zones (Shenzhen and Zhuhai in Guangdong province and Chongqing and Chengdu in Sichuan province) û all of which are quite affluent with high GDP growth rates and high consumption power. It operates some of the largest department stores in China with six of its stores occupying at least 40,000 square metres.

Maoye also differs from the other department store operators in China in that it has bought or is leasing several of its stores from a property company owned by its chairman. This company is primarily involved in the construction of commercial properties in prime locations and their relationship gives Maoye a chance to get involved at an early stage of construction and get a space that is specifically designed to meet its needs and specifications.

Like the pre-marketing, the institutional roadshow will be abbreviated and the deal will close on Thursday. The trading debut is scheduled for May 5.

The company is offering 863 million new shares plus a 15% greenshoe that could take total proceeds to as much as $484 million, if the price is fixed at the top of the range. As usual, 10% will be set aside for retail investors and standard clawback triggers apply.

Maoye is expected to be followed to the market by another consumption play, E-Land Fashion China Holdings, which is the fifth largest womenÆs apparel company in China and a spin-off of KoreaÆs E-Land World Group û a diversified business group that aside from the design, manufacturing and sales of clothing is also involved in advertising, construction, real estate, hotels, supermarkets software development and e-commerce among other things.

E-Land has been pre-marketing its offering since April 8, and was expected to kick off the formal roadshow today. However, sources said at the end of last week that the launch would be delayed slightly. One reason for the delay may be related to the fact that the company will increase the size of the offering to 25% of the company from an initial plan to sell 15% as the current market valuations would have made it difficult to meet the market cap threshold of HK$10 billion that is normally required to get a waiver to sell less than 25% of the share capital.

Sources say the company will be aiming to raise about $300 million, which it will mostly use to grow its business. The company doesnÆt operate any retail stores of its own, but sells its designs through department store concessions. At the end of last year it had close to 1,100 such concessions spanning more than 100 cities and 29 provinces, and according to a syndicate research report, it is planning to open another 1,200 over the next three to four years. Coupled with healthy same-store sales growth, improving margins on newer brands and a lower effective tax rate, this should allow the company to grow its net profit at a compound annual growth rate of 49% in 2007-2010, the same report projects.

Analysts regard Hong Kong-listed Ports International as the key comparable, noting that E-Land is currently going through the same rapid expansion phase as Ports did a couple of years ago with revenues growth of above 70%. By comparison, PortsÆ growth rates have come down to more sustainable levels in the mid- to high-20s. The latter does operate some stores of its own alongside its department store concessions, however, and is also a better-known brand in the international market which should warrant a valuation premium, they say. Ports is currently trading at about 23 times this yearÆs earnings.

Citi, Goldman Sachs and UBS are joint bookrunners for E-Land's offering.

Meanwhile, joint bookrunners ABN AMRO and BNP Paribas are also pre-marketing an offering for Asia Cement Holdings at the moment with the aim of launching a formal institutional roadshow next Monday (April 28). The company, which is a spin-off from Taiwan-listed Asia Cement Corporation and part of the Far Eastern Group, is looking to raise $200 million to $250 million through the sale of 25% of its share capital. The final decision on whether to go ahead will depend on the investor feedback this week.

Sources say one potential difficulty stems from the fact that the Taiwan-listed parent has gained 16% this year, while Hong Kong-listed cement players like Anhui Conch Cement and China National Building Materials have fallen 17% and 50% respectively. This has reduced the valuation premium in Hong Kong to a level where the benefits of a separate listing of the groupÆs Chinese operations are no longer that obvious.
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