Shenzhen department store seeks up to $130 million from HK IPO

Shirble Department Store comes to market at a time when there are bigger names, including Agricultural Bank of China and Guotai Junan Securities, competing for investor appetite for IPOs.

Shirble Department Store Holdings, a Shenzhen-based department store operator, is looking to raise as much as HK$1 billion ($130 million) in a Hong Kong initial public offering to fund its expansion in southern China.

In theory, growing wages in this part of the country make retail consumption plays more appealing, especially locally well-known brand names like Shirble, which has many loyal customers in Shenzhen, a city just across the border from Hong Kong.

But the issue comes at a time when there are bigger names in the market competing for investor demand. Agricultural Bank of China (ABC) is expected to absorb a lot of market liquidity with its massive A- and H-share IPO of up to $21 billion and Guotai Junan Securities' Hong Kong division hopes to pocket up to HK$2.31 billion ($296 million) from its Hong Kong share sale.

Shirble is offering 375 million shares, of which 315 million, or 84%, are new. The remaining 16% are secondary shares, which will be sold by its chairman Yang Xiangbo. The offering price ranges from HK$2.11 to HK$2.81, which translates into a price-to-earnings (P/E) ratio of 15 to 20 times based on the company's forecast earnings for 2010. By comparison, Shirble's local competitor, Shenzhen-based Maoye Department Store, which listed in Hong Kong in 2008, currently trades at 27 times. Gome Electrical Appliances, whose founder and former chairman Huang Guangyu was sentenced to 14 years in prison for insider trading and bribery last month, is trading at around 22 times.

Shirble plans to open eight additional stores in Guangdong and Hunan in the next three years, chairman Yang told Hong Kong reporters last week. He also said that the company will distribute 30% of its profit in the second half to public shareholders.

There are no cornerstone investors participating in the deal. The share sale is arranged by BNP Paribas, the final price is expected to be fixed on July 2 and the trading debut is scheduled for July 8.

Although founded as recently as 1996, Shirble is among the oldest stores in Shenzhen. The company operates 11 mid- to low-end department stores in Shenzhen and in Hunan province. The best store to compare Shirble with is Rainbow Department Store, which has outlets in the same kind of neighbourhoods and targets similar types of customers, but it is listed in the A-share market and trades at a forward P/E ratio of around 46 times.

Maoye, which operates high-end department stores in Shenzhen, didn't come to market at a perfect time either. It raised $343 million in a scaled-back IPO in Hong Kong in April 2008 after calling off its first attempt at a Hong Kong listing three months earlier as tough market conditions pushed down the share prices of its peers, making Maoye's valuation less attractive. At the second attempt, the company priced its shares at HK$3.10, towards the low end of the indicated range. Analysts said investors were cautious with new equities at the time and were unimpressed by the share's relatively expensive valuation, which was 20.7 times the retailer's projected 2008 earnings. The stock fell below the IPO price in its trading debut.

Shirble's net earnings increased to $20.6 million in 2009 from $14.8 million in 2007, it said in an IPO filing with the Hong Kong stock exchange. Analysts predict its net profit will be $27 million this year.

Currently, 10 of the company's department stores are operated on leased premises, while only one is located on premises owned by the company. It intends to continue operating stores mostly on leased premises, the company said in the statement.

Retail sales of consumer goods in China increased nearly eight-fold from Rmb1.42 trillion ($209 billion) to Rmb10.84 trillion between 1993 and 2008, according to the National Bureau of Statistics of China. The per capita annual consumption spending by urban households more than doubled from around Rmb5,309 in 2001 to Rmb11,242 in 2008.

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