Retail investors flock to IPO by Chinese menswear brand

Evergreen International's retail tranche is 1,231 times covered, making it the most heavily oversubscribed retail offering so far this year.

Yet another Chinese retail consumption play -- Evergreen International -- has received overwhelmingly strong demand from retail investors ahead of its Hong Kong listing. According to a source, the retail portion of the company's initial public offering, which initially accounted for 10% of the deal, ended 1,231 times subscribed, making it the most heavily oversubscribed retail offering so far this year.

The price was fixed at the top of the offering range, allowing the company to raise HK$1.089 billion ($140 million).

Evergreen, which is one of the leading menswear enterprises and brand operators in China, attracted lots of interest even before launch and the institutional order book was fully covered about 30 minutes after the bookbuilding started on October 18. Some 225 institutional investors participated in the transaction and they too ordered multiple times the shares available for them, the source said.

Evergreen's institutional tranche saw a good mix of investors, although long-only funds accounted for most of the big orders. However, most of them had to be scaled back as the strong retail demand triggered a full clawback that increased the retail allocation to 50% from 10% and reduced the institutional tranche by the corresponding amount.

Although the initial retail tranche was obviously quite small at just $14 million, the hefty subscription ratio meant that the Hong Kong public ordered more than $17.2 billion worth of shares. This is more than the $14.4 billion that they committed to AIA Group's IPO earlier this month and the $2.8 billion they put into Agricultural Bank of China's initial share offering in July -- both of which were significantly larger than Evergreen.

However, it did not quite match the retail demand for Sihuan Pharmaceutical, a Chinese manufacturer of cardio-cerebral vascular drugs that raised $714 million in an IPO earlier this month. Sihuan attracted more than $28.5 billion of retail orders.

Investors are interested in Evergreen because it is set to benefit from China's growing retail consumption, the source said.

Nearly all the recent consumption IPOs in Hong Kong have attracted good demand from retail investors, which has allowed issuers to price shares at the top of indicated ranges and forced them to increase the size of the retail tranche.

The earlier mentioned Sihuan Pharmaceutical achieved a subscription ratio of more than 400 times for its retail tranche and 20 times for its institutional tranche. In Chinese department store operator Springland’s $477 million IPO, retail investors booked 80 times the shares initially earmarked for them, while institutional investors ordered 16 times the shares available to them. The one consumer retail play that didn’t attract as much interest was Yashili, a Chinese baby formula producer, whose products were among those found to be contaminated with melamine in 2008.

Sihuan’s shares soared 25% from its IPO price of HK$4.60 in their first day of trading yesterday, compared with a 0.2% increase in the benchmark Hang Seng Index.

Evergreen offered 236.67 million new shares at a price between HK$3.80 and HK$4.60 each. The final price of HK$4.60 translates into 19.5 times the company's projected earnings for 2011, which equals a discount versus Hong Kong-listed Lilang, which is currently trading at a 2011 price-to-earnings multiple of 23 times, a source said. Lilang is one of Evergreen's competitors in the domestic market.

The deal comes with an option to sell an additional 35.5 million new shares, representing approximately 15% of the total number of shares initially available. If exercised in full, the total proceeds would increase to $161 million.

The company plans to start trading on November 4. CLSA and Piper Jaffray are joint bookrunners of the deal.

Evergreen operated 268 retail stores in China as of June 30. It made Rmb104 million ($15.5 million) of net profit in 2009 and Rmb70 million in the first six months this year. It will use 45% of the IPO proceeds to expand and improve its retail network, and 20% for acquisitions or licensing of additional brands.

According to J.P. Morgan, menswear and luxury product companies will demonstrate strong earnings prospects as Chinese men attach an increasing importance to their clothes, and growing household incomes boost the demand for expensive items.

“Now it’s time for Chinese men to take care of their own look after spending lots of money on their wives' and children’s clothes,” Frank Li, head of China research at J.P. Morgan, said at a recent press briefing.

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