December in Hong Kong started with yet another launch of an initial public offering. And it is perhaps fitting that it is a retail play that it trying its luck with investors in one of the busiest consumer spending months of the year. However, as the holiday season draws nearer, the question remains whether investors will be willing to dedicate too much more time researching new investments.
Arguably, the key to attracting attention in this environment is to have something unique to offer and PCD Stores (Group) believes it does. Aside from its well-established department store business, the company has recently launched its first outlet mall -- a business that is more about volumes than margins, but which analysts believe can become a future growth driver as Chinese consumers seek out branded products at good value.
According to a preliminary listing document, PCD Stores believes that it will be able to attract a new pool of customers through the outlet malls that can be gradually converted into regular shoppers at its department stores. The outlet malls can also be used to sell off-season merchandise and to build new brand relationships for future expansion. The company is currently studying plans to open other outlet malls in the city of Shenyang and in Shandong province.
PCD Stores is also backed by the same people -- the Chan family -- as Hong Kong-listed Ports Design, a well-known women's retailer focusing on designer clothing, which should make investors more comfortable with the newcomer.
The company is seeking to raise between HK$2.48 billion and HK$3 billion ($320 million to $387 million) by selling 37.5% of its enlarged share capital. However, only two-thirds of those shares are new. The rest is coming from venture capital firm 3i Investors and from the Chan family. 3i, which is among a number of high-profile pre-IPO investors who have supported the company since late 2005, will sell all of its shares in the IPO. Other pre-IPO investors include Credit Suisse, Citi, Deutsche Bank and Morgan Stanley, which will be locked up for six months after the listing.
PCD Stores owns and operates nine department stores and provides management consultancy services to another seven. The stores focus on high-end and luxury products, generally targeted to high-income earners, including brands like Armani Collezioni, Burberry, Cartier, Ermenegildo Zegna, Hugo Boss, Ralph Lauren and Ports 1961. Its flagship store, the Scitech Plaza in Beijing, contributed close to 52% of its revenues and 59% of the net profits in the six months to June.
The number of self-owned stores has more than doubled over the past few years from four in 2006 and the company will continue to expand at a rapid pace. According to a term sheet, 41% of the IPO proceeds will go towards the opening of new stores, upgrading existing stores and acquiring premises for new stores, while 28% will be used for the acquisition of "suitable targets in the department store industry".
Some 21% will be used to fund a portion of the development and construction costs for phase II of its store in Xian, while the remaining 10% will be set aside for working capital.
The company is offering 1.5 billion shares at a price between HK$1.65 and HK$2.00 apiece, which translates into 16 to 19 times the projected earnings for 2010. This puts it at a discount to all other Hong Kong-listed department store operators. However, if you exclude Parkson and Golden Eagle, which are much larger and trade at 2010 price-to-earnings multiples of 28 and 31 times respectively, then the discount narrows quite substantially.
New World Department Stores trades at about 21 times, Intime at about 23.5 times and Maoye at about 19.5 times.
PCD Stores is expected to fix the price of its IPO on December 9 and the listing is scheduled for December 15. Credit Suisse is the sole bookrunner.
Shengli Oil & Gas Pipe
PCD Stores will be in the market at the same time as another company that brings a rather unique concept, although in an entirely different sector. Shengli Oil & Gas Pipe Holdings, which kicked off its IPO on Monday, is the only independently owned Chinese manufacturer of transmission pipelines for oil and gas -- an industry that, due to strict environmental and safety regulations, has only seven players. The other six are all owned by larger corporations, including Sinopec and China National Petroleum Corp.
China's need to expand its energy infrastructure should ensure high growth for the pipeline industry and Shengli is in a good position to benefit, people familiar with the company say.
According to a preliminary listing document, Shengli was the largest manufacturer of spiral submerged arc welded (SSAW) pipes in China at the end of 2008 in terms of annual production capacity (540,000 tonnes) and the number of production lines (seven). Two more production lines with a combined capacity of 100,000 tonnes are currently under construction and are expected to be completed in 2010. In the first half of this year, it increased its market share of oil and gas SSAW pipes in China to 22% from 17% in 2008.
The market share gains have come on the back of an extensive expansion, which has also led to a sharp jump in earnings this year. At the half-year mark, the net profit amounted to Rmb144.88 million ($21 million), already more than 97% of the profit it achieved in 2008 as a whole. A syndicate analyst estimates that the net profit will increase by 125% this year, followed by growth of 30% in 2010 and 44% in 2011.
The company is seeking to raise between HK$1.3 billion and HK$1.94 billion ($168 million to $250 million) by selling 30% of the company. There will be 720 million shares on offer, of which 600 million are new. The rest will be sold by chairman Yen Teng-seng and two private equity funds, Apollo Asia and Advent Equity, which will exit part of their investments.
The price has been set at HK$1.81 to HK$2.69, which translates into a 2010 price-to-earnings multiple of 8.8 to 13.1 times. As there are no other listed Chinese pipeline makers to compare it to, investors will likely look at the broader small- and mid-cap industrials space. There are also a couple of pipeline makers in India, Welspun Gujarat Stahl Rohren and Jindal Saw, that could serve as a benchmark.
The final price will be determined on December 11 and the shares will start trading on the Hong Kong main board on December 17. Macquarie is the sole bookrunner.