Peak Sport Products IPO shoots for $246 million

Chinese sportswear company Peak Sport Products yesterday launched a roadshow for an initial public offering expected to raise as much as HK$1.9 billion ($246 million). The deal comes on the heels of the IPO of another Chinese sportswear company, 361 Degrees International, which raised $231 million in June.

Peak Sport is offering 419.5 million new shares, which is equal to 20% of the company. An indicative price range has been set at between HK$3.55 and HK$4.55 a share, which makes the deal size between HK$1.49 billion and HK$1.9 billion ($192 million and $246 million). The 15% greenshoe could bring another 62 million shares in the deal and increase the maximum proceeds to $283 million.

Peak Sport is a Fujian-based company that manufactures and retails sports shoes and apparel. Its focus is basketball, and unlike many of the other sportswear companies that have listed in Hong Kong over the past year-and-a-half, it positions itself as a company that produces functional sportswear products, rather than fashion-focused goods.

But that doesn't mean branding is not important. The company is an official market sponsor of the National Basketball Association (NBA) in North America. It also sponsors seven individual basketball players, such as Sonny Weems, Darnell Jackson and Ron Artest. The company targets the mass market in China, with a focus on second- and third-tier cities.

In 2008, total sales revenue amounted to Rmb2 billion, with about half derived from apparel and the other half derived from footwear. In the first half of 2009, sales revenue was Rmb1.4 billion.

The lion's share of the IPO proceeds, 48.3%, will be used for advertising, brand promotion and other marketing activities. A further 18.8% will be used to expand the apparel and footwear production facilities and 15.6% will be used to expand the sales network. The remainder will be split between research and development, upgrading the management information system, and working capital.

In terms of companies listed in Hong Kong, the Chinese sportswear sector is already very crowded. This is in part due to a couple of IPOs that occurred during the run-up to last year's Beijing Olympics -- Xtep International, which raised $285 million, and Pou Sheng International (Holdings), which raised $322 million. Other high-profile names include China Dongxiang (Group), the company that owns the rights to the Kappa brand in China, and the grand-daddy of the sector, Li Ning.

The most recent sportswear IPOs have not been strong performers. Xtep listed at HK$4.05 a share, and yesterday closed at HK$4.10, and Pou Sheng, which priced at HK$3.05, yesterday finished at HK$1.29. The sector's most recent listing, 361 Degrees, is still trading 3% below its June IPO price at HK$3.50.

Therefore the key for Peak Sport is differentiation. One major feature is that the company is 20 years old, giving it the same kind of heritage as Li Ning and distancing it from companies like 361 Degrees, which is only a few years old. In terms of valuation, Peak Sport is being offered near the bottom of the pack, which will also add to the attraction. The price range values the company at between eight and 10.5 times its estimated earnings for 2010. Li Ning is currently trading at around 20 times, Xtep at around 10.5 times, and 361 Degrees around 8.5 times.

Credit Suisse is the sole bookrunner of the Peak Sport IPO. Pricing is expected to occur on September 22 and the trading debut is scheduled for September 29.