Retail books open for Cosmo Lady IPO

The retail tranche opened for China's leading lingerie maker on Monday, with the institutional book already multiple times oversubscribed.

Retail books opened on Monday for an initial public offering of shares by Chinese lingerie maker Cosmo Lady as the Hong Kong market continued its recent flurry of new deals.

Cosmo Lady aims to raise $232 million this week by pricing 406 million shares between HK$3.27 and HK$4.42 per unit.

The institutional book, which opened last Thursday, is already roughly three times covered, with most of the demand coming in at the lower- to middle-end of the price range, according to a source familiar with the deal. 

Bankers told FinanceAsia that they anticipate a decent level of retail investor interest in Cosmo Lady because the company is a recognisable name with a significant presence in the country. Cosmo Lady last year accounted for 2.8% of total underwear sales in China, nearly three times the market share of the country's number two player, Embry Holdings, according to Frost & Sullivan.

The Dongguan-based company is proposing to issue 21.3% of its enlarged share capital pre-greenshoe and 24% post-greenshoe, with shares set to price June 19 after the New York close, according to a banker close to the deal.

The IPO is happening at a time when confidence may be returning to local markets — the Hang Seng China Enterprises Index, which tracks the performance of Chinese companies listed in Hong Kong, is up 2% so far this month. But escalating violence in Iraq led to most Asian stocks falling Monday, with the MSCI Asia Pacific Index dropping 0.33%. Japan’s TOPIX similarly fell 0.75% today.

Relative pricing

Under the leads of CICC and Morgan Stanley, Cosmo Lady is being marketed at 11.5 to 15 times forecast 2014 earnings, valuing the company at between $820 million and $1.1 billion.

At that level it is being marketed at roughly the same level as Belle International Holdings, a Chinese footwear and sportswear retailer that is currently trading at 12.14 times expected 2015 earnings. 

Belle, though, isn't directly comparable with Cosmo Lady due to its different product mix and business model.

China's number two lingerie company Embry also differs from Cosmo Lady insofar as it targets a higher-end clientele for its bras. Cosmo Lady’s focus is on the mass retail market, although the company has plans to enter the high-end lingerie market soon. Embry is currently trading on a 2013 price-earnings ratio of 9.6 times, with shares down about 15% so far this year.

Cosmo Lady has 5,790 outlets in more than 330 mainland Chinese cities, the majority franchised. Just 721 are self-run.

Solid growth

Rising Chinese demand for intimate wear has helped boost Cosmo Lady's revenues and profits in the past three years and the company expects similar growth in the next few years.

China’s overall intimate wear industry grew at a compound annual growth rate of 14% from 2009 to 2013, according to Frost & Sullivan, which expects that pace to accelerate to 19% by 2018 when total sales should hit Rmb455.3 billion.

Cosmo Lady hopes to capture a significant share of this growing market, having seen its revenue jump in 2013 by 26% year-over-year to Rmb2.9 billion ($466.3 million) and by 71% compared with two years earlier. The company's net profit totaled Rm275.5 million in 2013, compared with Rmb192.6 million in 2012 and Rmb168.6 million in 2011.

Some 39% of Cosmo Lady's targeted IPO proceeds are earmarked for expanding its retail network and adding 2,000 self-run stores over the next four years. A quarter will be used to finance the company’s logistics centres in Dongguan, Tianjin and Chongqing, while 13% will be used for acquisitions. Seven percent of the proceeds will go towards working on its design, research and development centre, and an additional 7% will be used for improving the company’s IT infrastructure.

To help raise public awareness, the company has hired celebrities to represent it  — Taiwanese model and actress Lin Chi-Ling has endorsed Cosmo Lady’s products since 2012. But this has led to its marketing and promotion costs ballooning, with gross sales and marketing expenses increasing 123% to Rmb295.3 million in 2013 from Rmb132.7 million in 2012.

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