Pacific Textiles prices IPO slightly off the top

The fabric manufacturer prices its $245 million IPO at a premium to its comparables but slightly below the top of the range, leaving room for secondary market gains.
Pacific Textiles has priced its initial public offering slightly below the top of the price range at HK$5.35, after attracting strong demand from institutional as well as retail investors. The final price gives a total deal size of $245 million (HK$1.9 billion).

The Chinese textile manufacturer could have set the price at the upper end of the HK$4.15 to HK$5.50 range, but chose to leave more room for the share price to go up in the aftermarket, according to sources.

The institutional tranche was 45 times covered post-clawback and counted over 250 orders, the sources say. The clawback, which reduced the institutional portion from 90% to 70% of the deal, was triggered by solid demand from retail investors who ended up subscribing to 46 times the shares originally earmarked for them. To trigger a full clawback, which would have increased the retail trance to 50% of the total, compared with the 30% they ended up with, retail investors would have had to order 100 times the shares on offer to them.

There was little price sensitivity among institutional investors and the conversion ratio from the roadshow was as high as 86%. The majority of the demand came from Asia, although conversion rates from the US and Europe were also high at 90% and 85% respectively. High-net-worth individuals also piled into the deal.

ôCompared with its peers, this is just a superior company,ö says one source. ôIt has higher growth and higher return-on-equity and people like the fact that the management is very experienced. The company also focuses on producing more value-added products with much higher margins.ö

The final price values the fabric manufacturer at 11 times its projected earnings for fiscal 2008, which ends in March next year. This pitches it at a slight premium to its Hong Kong-listed peers. Among those, Texwinca and Victory City International, which also have fiscal years ending in March, trade at 2008 price-to-earnings multiples of around 10 and 6 respectively. Fountain Set, which has a fiscal year ending in August, trades at a P/E multiple of 8.3 for fiscal 2008.

Pacific Textiles will allocate 47% of its net proceeds ($98 million) to repay an existing syndicated loan and other bank loans which were used for working capital and other operational purposes. Around 43% ($90 million) of the funds raised will be used for expanding and upgrading the facilities and operations, while the remainder will go towards general working capital.

The company sold 358 million new shares, equivalent to 25% of its enlarged share capital. There is also a 15% greenshoe which could boost the total proceeds to about $282 million. The deal was jointly arranged by Citi and Morgan Stanley.

Pacific Textiles was founded in 1997 by Wan Wai Loi, who was previously an executive director of Fountain Set. In fact, no fewer than four of the companyÆs executive directors previously held the same role at the rival firm, including Choi Kin Chung who was a co-founder and vice chairman of Fountain Set.

The textile manufacturer, which offers fabric knitting, dyeing and finishing services and produces knitted fabric products from raw or dyed yarns, has an edge over its closest comparables in the mid-stream of the textile supply chain in that it makes more complex and higher-value products. One example is its production of higher-margin fabrics for inner-wear and swimwear, which made up approximately 30% of its revenues in the fiscal year to March 2006.

Fountain Set, Texwinca and Victory City also make cotton knitted fabrics, but focus mainly on fabrics for leisure wear, which are less difficult to make and command lower margins.

Higher sales will be the key growth driver for Pacific Textiles, according to sources close to the company, and syndicate research forecasts sales increases ranging from 20% to 30% between fiscal 2007 and 2008. The company reported a net profit growth of 30% to HK$459 million in the year to March 2006 and by fiscal 2009 its bottom line is expected to exceed HK$800 million ($102 million), equivalent to a compound annual growth rate of around 20%.

In addition to its dyeing and knitting of fabrics for apparel production, Pacific Textiles is also trying to boost its earnings by moving into the manufacturing of more niche fabrics. In 2005, it entered into a joint venture with Suminoe Textile and Marubeni Corporation to produce fabrics for Japanese auto makers in China.

The trading debut is scheduled for May 18.
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