In this October's issue of FinanceAsia magazine, we profile Alfred Chan, CEO and president of upscale Chinese fashion house Ports Design. The company is currently in the process of completing a 35 million share IPO on the Hong Kong Stock Exchange, with pricing scheduled after New York's close on Friday.
CLSA is lead manager for the deal, which is already said to be comfortably oversubscribed by institutional investors and will raise HK$435 million ($56 million) at the top end of the price range, including the greenshoe. The transaction is being pitched at HK$9 to HK$10.83 per share, representing a p/e ratio of 11.5 to 14 times 2003 earnings.
As a result of the flotation, the company will have a freefloat of 35%. This includes a stake held by Suez Asia Holdings, which will reduce its holding from 15% to just under 5%. The private equity firm is selling 10% of its stake in secondary shares. The remainder will be primary shares.
Observers say the company has few obvious comparables since Ports is a high-end retailer unlike locally listed companies such as Giordano and Esprit and unlike most in the retail sector, it is also vertically integrated - ie it makes and distributes its own brand of clothes. Key to the sales pitch is the attractive combination of a low cost manufacturing base in China and international pricing power.
Each month in FinanceAsia, we run a "China Entrepreneur" profile. Here is what Chan had to say to our China Editor, Dan Slater.
From China to Hong Kong via Canada and back to China is a circuitous but not untypical route for your average member of the Chinese diaspora. Such geographical flexibility is often just one feature of an entrepreneur, and in the case of Alfred Chan, CEO and president of fashion company Ports China you can add the importance of family as well.
Chan's family showed undoubted entrepreneur-like characteristics when it acquired Ports from its founder, Luke Tanabe in the late 1980s. That acquisition was to be the bedrock of Chan's own venture into the clothing business.
While Ports is thriving in North America and Europe, a family war council decided to send Alfred to the mainland on a reconnaissance mission to discover if China's blue-jacketed masses were ready for the sober luxury that Ports prides itself on.
After a bruising investigation which took in most of China's 30 provinces and some 20 cities, Chan reported back to headquarters that China was definitely on the move, and in 1993 he set up Ports China initially as a BVI company, later changed to Bermuda.
The company's approach is a tribute to the changes occurring in China, since it doesn't manufacture for export but targets the up and coming middle class segment in China.
"China's wealth is on an upward trajectory and it's no flash in the pan. And Chinese culture has a special aspect which we are capitalizing on: the strong desire to show you have 'made' it, a type of exhibitionism which leads people to conspicuous consumption," says a clear-eyed Chan.
To back his point he quotes a Chinese proverb to the effect there is little point in wearing beautiful clothes in the dark.
Indeed, Ports is a common site in most up market fashion malls. It positions itself as a vendor of well-cut, classy clothes, with a formal look. While some of the produce is manufactured in China, it also carries Italian suits, English shoes and French perfume. Its relevance to local tastes and pockets is immediately apparent by the number of shoppers it attracts, unlike many high-end European brands, whose shops tend to be often completely empty.
To complement the formality of the Ports look, Chan also negotiated a deal with car maker BMW which enables the company to be the only franchisee world wide for the BMW Lifestyle range of sports and casual clothes. So far, there are seven stores in China.
The company has been profitable ever since it opened its doors. Last year its 250 stores all over China generated a turnover of Rmb500 million and profits reached Rmb92 million after tax, a spectacular increase on the Rmb5 million figure of its first year. The company has Rmb40 million in cash. Net borrowing amounts to Rmb13 million.
Not only that, having distributed Rmb60 million to its shareholders last year, the company has the kind of generous dividend policy which can only bring a smile to the company's two major shareholders, the Government of Singapore's Investment Corporation and France's Suez Asia Holdings, a subsidiary of Credit Agricole Indosuez with around 15% each of the issued and outstanding shares in the Bermuda entity. The balance is held by Ports' Canadian operation.
That growth has coincided with increasing recognition for the Ports brand. In 1998, the brand came fifth in a national brand awareness survey by AC Nielsen, but jumped to first place last year, ahead of heavyweights Chanel, Louis Vuitton, Gucci and Esprit.
Chan's personality exudes something of all the countries he has visited. He speaks English with just a hint of a North American accent and with a pleasant unhurriedness that recalls his Canadian background, yet his views on business have a characteristic Hong Kong crispness.
He says that he feels it's his Canadian upbringing that has resulted in a tolerant and respectful company culture.
"I think an absence of bigotry and prejudice is typical of Canada, and that's carried over to staff relations here in China. Salary-wise, the gap between mainland and Canadian salaries is narrowing, despite the much lower cost of living in China. And Chinese staff know that if they do what they have to do, they can reach the top of the company," he says.
With that attitude it's not surprising that that he feels such an affinity with Xiamen, a pleasant coastal city opposite Taiwan, which he describes as the 'Miami of China'.
"Quality of life is something that we treasure and Xiamen can offer that to our expat and local staff," he says.
Xiamen was a city which was right on the front line when relations and Taiwan seemed far more likely to trigger a war than they do now. Consequently, the government shunned Xiamen and it avoided playing host to heavy industrial plants of the kind that have blighted the existence of many North-eastern cities. The city government realized that it would have to carry out an active policy of wooing foreign investors as its primary source of growth. Facilitated by its status as a Special Economic Zone, 80% of the city's GDP now comes from foreign investment, including US computer giant Dell.
Still, Xiamen for all its laidback charm and nascent surfing culture is a far cry from the beauty worshipping fashion victims of Shanghai, not to mention from Shenzhen, where much fashion apparel in China gets manufactured.
"The Shanghainese, despite their passion for fashion, are still fairly derivative," he explains. "These days fashion can originate all over the world, and we have agents from the King's Road in London to Shinjuku in Tokyo."
Still, while his chief designers, two Canadian sisters of Italian extraction, generate the creativity necessary for a clothing company, local staff decide what to purchase for the China market.
"We once had a very attractive range of linen summer jackets on sale in China, but discovered that they were associated with funeral attire. We haven't made a similar mistake since," says Chan.
Yet while he has fulfilled part of the entrepreneur's mission of creating something from scratch, it's undeniable he had more backing, from his equally entrepreneurial family, than many entrepreneurs.
Chan agrees. "I think it's very important for a company to have a set of legends, or stories. A start up necessarily lacks that. Take for example one of our most successful products: the boyfriend jacket. The boyfriend jacket arose when one of our designers left the opera with her boyfriend. Since it was a chilly night, the boyfriend draped his jacket over her shoulders, and catching a glimpse of herself in the window, she decided to design one like it. Now the boyfriend jacket, an outsize jacket with extra long sleeves which you have to roll up, is one of our best sellers," he explains.
So what's the next step for Ports?
The link up with GIC and Indosuez provides a clue, since with such a strong cash flow it's not cash that provided the main attraction for the link-up.
"Both of these companies, especially Indosuez, have links to the other fashion brands. We are hoping at some point to explore different options concerning how to capitalize on that," he says.
Of course, the existence of such shareholders also points strongly to the prospect of an IPO, although Chan prefers not to confirm such a supposition.
"We like the idea of an IPO since it will help to reward our staff. All our staff have share options and an IPO would bind them more closely to the company and reward them for their loyalty and diligence," he says.
Although that' s not a very convincing justification to bring to yield hungry investors, Chan pleads ignorance.
" I leave that to the experts. In any case, an IPO is one option in the many that we are exploring," he says.
Based on its past record, options is not something the company looks likely to run out of soon.
