Maoye welcomes a different kind of shopper

The department store operator aims to raise as much as $700 million from one of the first Hong Kong IPOs this year.
Maoye Department Store is getting ready for a different kind of shopper to those browsing for fashion items or perfumes as it kicks off the pre-marketing of an initial public offering that could raise as much as $700 million.

Coming at the beginning of the year, Maoye will be hoping to catch investors at a time when they are ready to build up new exposures and, thanks to the strong performance of other players in the industry, it should have few problems attracting their attention. Whether investors will also open their wallets will depend to a large extent on the valuation, but the strong reception for a placement in Parkson Retail Group earlier this week suggests that department stores havenÆt lost their status as a ôhotö sector.

Maoye is expected to use its Goldman Sachs-led IPO as the starting point for a period of aggressive expansion, which should result in strong earnings growth. According to sources, the company has confirmed that it will be adding a total of seven new stores over the next two years through organic growth, of which five will be in the south, south-western and eastern parts of China where its existing 15 stores are located. The other two will be set up in the Liaoning province and will mark MaoyeÆs first move into north-eastern China. It is also seen as a sign that the company is an emerging nation-wide player. Like its existing ones, the new stores will target medium- to high-end consumers.

Syndicate analysts estimate that the company's net profit will improve by 89% in 2007, 70% in 2008 and 43% in 2009, which translates into a compound annual growth rate of 66% for 2006-2009, driven by these new openings. But the growth could potentially be even greater than that since Maoye will also set aside 35%-40% of the net IPO proceeds for potential acquisitions compared with the 30%-35% that will go towards organic store expansion.

So far, the company has made only one acquisition, which was its purchase in July 2005 of a controlling stake in Shanghai-listed Cheng Shang Group. But its track record is good, having turned this former state-owned enterprise (previously known as Chengdu PeopleÆs Department Store) from a loss-making entity (the shortfall amounted to about Rmb250 million ($35 million) in the first half of 2005) to a profitable business within two years.

This has been achieved partly through store renovations, the introduction of more high quality brands and a reduction in staff by more than two thirds to about 2,000. Cheng ShangÆs share price, which at the time of the takeover was trading below Rmb3, has soared to about Rmb23 which gives some indication of the value created by the new owners.

According to a source, this has led to the company being approached by the leadership of other provinces proposing Maoye take over ailing state-owned department store operators in their regions too with the aim of turning them around.

Much of the credit for this ought to go to chairman Huang Mao-ru, who also owns 100% of the company. Among other things, Huang is said to have "great visionö and be very creative when it comes to marketing and promotion of his stores. Recently, one of the biggest stores in Shenzhen was kept open non-stop for 68 hours in a drive that sources say was highly successful in terms of attracting shoppers.

Maoye will be offering 25% of the company in the form of 1.25 billion new shares, plus a 15% greenshoe. The price range will be set prior to the launch of the formal roadshow on Monday, but sources say the valuation is expected to be in line with that of other regional Chinese department store operators that are listing in Hong Kong, i.e. Intime Department Store and Golden Eagle Retail Group, which trade at an average 2008 price-to-earnings ratio of 32 times.

Parkson Retail and New World Department Store China, which are viewed as nationwide players, currently trade at P/E multiples above 40. According to Bloomberg Data, Parkson is quoted at 46 times this yearÆs earnings after gaining 4.3% yesterday. The gains came despite a sell-down of $80.1 million worth of shares by its controlling shareholder on Tuesday.

New World has a fiscal year ending in June and is currently trading at a fiscal 2008 P/E ratio of 44.6 times and at a fiscal 2009 P/E of 31.5 times. At the moment, Parkson has 39 stores and New World has 28, making both of them significantly larger than Maoye. As a further comparison, Golden Eagle has nine stores and Intime five.

The valuation of Maoye will be slightly more complicated than comparing store areas and profitability, however, as the Cheng Shang acquisition in 2005 not only doubled MaoyeÆs store network, but also brought with it a number or real estate projects that are now helping to boost the companyÆs valuation. A property valuation conducted by CB Richard Ellis, estimates the value of these property assets at Rmb7.7 billion ($1.1 billion). According to a source, syndicate analysts are therefore using a sum-of-parts valuation methodology for Maoye.

The property projects could be one reason for why the deal is now expected to be significantly larger than the $300 million to $400 million earlier reported by local and trade media. Another reason is strong share price performance by most of its sector comparables, which will enable Maoye to offer shares at a higher valuation than initially anticipated. Since the beginning of 2007, Parkson has risen 126%, while laggard Golden Eagle is up 25%. Intime and New World Department Store, which went public in March and July last year, have gained 58% and 78%, respectively.

Aside from the store expansion, other selling points for Maoye include its 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; the fact that it operates some of the largest department stores in China with six stores of at least 40,000 square metres, and its high concession rates. At 21.4% in the first three quarters of 2007, the concession rates are above that of its four Hong Kong-listed rivals, whose rates range from 17.3% to 20.7%.

The concession rate measures the amount of revenue that the company gets from the retailers that rent space in its stores and is an important indication of how well the stores are run and how attractive they are.

Maoye is also benefiting from the fact that its chairman also owns a property company that is primarily involved in the construction of commercial properties in prime locations. The department store operator has bought or is leasing several of its stores from this company which gives it a chance to get involved at an early stage in the construction and get a space that is specifically designed to meet its needs and specifications.

The final price is expected to be determined on January 25 and the trading debut is scheduled for February 1, putting it among the first few companies to list in Hong Kong this year. Also pre-marketing is Macau casino operator Sociedade de Jugos de Macau, which is expected to raise between $800 million and $1 billion with the help of Deutsche Bank.

Smaller players in the market include Guangzhou-based property developer Cheng Shang Properties, which has hired BOC International and Cazenove to help it raise about $200 million; and Sun Fook Kong, a construction company controlled by Great Eagle Holdings managing director Lo Ka-shui. Sun Fook Kong is reportedly also hoping to raise about $200 million from an ICEA-led IPO.

Meanwhile, onshore oil drilling company Hunghua is up for a Hong Kong listing committee hearing today. If it gets the all clear, it is expected to start pre-marketing for a $500 million to $600 million IPO next week. Credit Suisse and Morgan Stanley will be joint bookrunners.
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