New World spin-off raises $301 million from IPO

The deal for New World Department Store sees hefty demand from institutional investors, but retail orders fail to trigger a full clawback.
Like other listing candidates in the sector, New World Department Store has set the price of its initial public offering at the top of the range after drawing substantial interest from the market. The pricing allowed the department store operator to raise HK$2.4 billion ($301 million).

Demand from retail investors, however, failed to trigger a full clawback. Still, the tranche was increased from 10% to 40% of the total deal, after being more than 60 times subscribed, sources say.

Multiple choices in the primary market may have distracted retail investorsÆ attention during the order period. The launch of the public portion of the deal on June 28 was followed a day later by the retail offerings for Times Limited, a Chinese hypermarket and supermarket operator, and Fosun International, a Chinese conglomerate, which are aiming to raise more than a combined $1.5 billion from their IPOs.

The institutional tranche was over 80 times covered post-clawback, however, with more than 400 orders coming into the book. Of the total demand, 69% came from Asia, 21% from Europe and 10% from US offshore investors. There was barely any price sensitivity, and the conversion rate from the one-on-one meetings during the roadshow amounted to 95%, according to a source.

New World Department Store fixed the price at the top of the HK$4.80 to HK$5.80 indicative range, which implies a valuation of 27 times its projected earnings for the fiscal year to June 2008, the source says. This compares with a 2007 price-to-earnings multiple of 46 times for Parkson Retail Group and 38 times for Golden Eagle Retail Group, according to Bloomberg data. Both of these companies have a fiscal year ending in December and both are also larger than New World Department Store.

Department store operators have been favourites with retail investors for some time following Parkson Retail GroupÆs successful offering in November 2005 and the huge share price gains since then. Last year when Golden Eagle Retail Group closed the book on its IPO, the retail tranche was around 307 times covered, which equalled HK$43.5 billion ($5.6 billion) worth of orders.

Drawing similarly strong demand, Intime Department Store attracted HK$56 billion worth of orders from the retail market when for its IPO in March this year. This left the tranche 231 times subscribed and triggered a full clawback. By comparison, New World Department Store tied up HK$14.1 billion in retail cash.

According to people familiar with the marketing, investors still love the sector and they are bullish on the macro-economy of China. They also like the companyÆs national exposure and its comparative expansion advantage as it is close to Hong Kong-listed New World Development, which develops properties in China.

The company, which was a wholly-owned subsidiary of New World Development before the IPO, operates 16 self-owned and 12 managed stores in 16 provinces or municipalities in Greater China, ranking fifth in terms of revenues and second to Parkson on geographical reach. More than 60% of its stores are located in the most prosperous cities in the country.

Analysts say the operatorÆs net profit could double to HK$426 million ($54.5 million) in the fiscal year to June 2009 from HK$207 million in fiscal 2007. Net profit more than doubled to $19 million in fiscal 2004 to 2006, while sales rose 60% in the same period. The department store operator also recorded a gross profit margin from direct sales of 25% in calendar 2006, which was the highest in the sector, exceeding ParksonÆs 16.6% and Golden EagleÆs 18.8%.

The offering, which was jointly arranged by Deutsche Bank and HSBC, comprised 25% of the enlarged share capital, equivalent to 406 million new shares. A 15% greenshoe could further increase the deal size to $347 million.

The trading debut is scheduled for July 12.
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