Supermarket chain Beijing Jingkelong relaunches IPO

The valuation is slightly cheaper than that talked about last time, but the company is still being pitched in between Lianhua Supermarket and main Beijing rival Wumart Stores.
Beijing Jingkelong will go on the road today in its second attempt this year to become a listed company, banking on a strong equity market and overwhelming demand for the most recent Hong Kong IPO to provide a favourable backdrop.

Jingkelong, which operates hypermarkets, supermarkets and convenience stores in the Chinese capital, is looking to raise up to HK$594 million ($76 million) ahead of a listing on Hong KongÆs Growth Enterprise Market.

DBS Vickers Securities is the sole bookrunner for the offering, which comes as the Hang Seng Index closed at a new six-year high of 17,513 points on Monday before edging back 75 points yesterday.

The basic structure of the deal remains the same as on the previous occasion û the company is selling 36% of its enlarged share capital or 132 million H shares, plus a 15% greenshoe in case of strong demand. However, the valuation has come down slightly in line with that of its listed peers, reducing the size of the overall offering.

According to a source familiar with the deal, the shares will be offered in a range between HK$3.90 and HK$4.50, which will value the company at 19.6 to 22.6 times last yearÆs net profit of Rmb75.1 million. Based on syndicate projections of 15% earnings growth this year, the 2006 PE range drops to 17.1 to 19.7 times.

Last time the marketing was called off before a price range was set, but the deal was being tested in the market at a 2005 PE multiple in the mid-20s which would have put the maximum deal size closer to $90 million.

The current price range still pitches Jingkelong between Wumart Stores, its main competitor in Beijing, and Lianhua Supermarket. Larger and more profitable Wumart, which has been expanding aggressively through acquisitions this year, currently trades at a 2005 PE ratio of 41.5 times and at a 2006 PE of 34.2 times.

Lianhua, a nationwide chain store operator with more than 2,000 self-managed stores, trades at 20.3 times last yearÆs earnings and 17.8 times its projected 2006 profit.

As reported by FinanceAsia during pre-marketing in April, Jingkelong differs from its supermarket peers in that it also has a wholesale and distribution business, which contributes about half its revenues. Some observers say this serves as a bit of a buffer should the consumers choose to shop in other retail outlets than its own. The wholesale business counts Wumart as one of its a customers.

Since its previous attempt to list, the company has opened 15 new stores, according to the source, bringing the additions in the first half to 21 and its total number of retail outlets to 173. In 2006-2008 Jingkelong is planning to grow its retail sales network by about 60%.

Jingkelong has recorded a compound annual growth rate of 40% in net profit over the past three years and in the first half of this year its bottom line increased by 23%, the source says. This suggests the 15% full-year growth assumption on which the valuation estimates are based may be conservative.

The IPO is expected to play into investor demand for Mainland retail concept stocks, which came into focus again last week when the institutional portion of sportswear manufacturer and distributor Win HanverkyÆs $88 million IPO was more than 30 times covered. Retail investors subscribed to more than 350 times the 10% that was earmarked for them.

ôWin Hanverky was 80% OEM and only 20% retail, while this (Jingkelong) is a 100% pure consumer play targeted at the middle class. That should make this deal even hotter,ö says one observer.

However, back in April some fund managers said the fact that Jingkelong is listing on the GEM board û its light asset structure means it doesnÆt qualify for the main board û could keep some investors away due to internal guidelines that sometimes restrict their investments to the main board.

Another key question will be how the smallish offering will fare compared with the other IPOs in the market at the same time, including China Merchants Bank's $2.66 billion deal which launched its own roadshow on Monday. Fertiliser producer China Blue Chemical is due to start taking orders for its up to $400 million deal next week.

Jingkelong initially planned to list at the end of April but called off its pre-marketing efforts after the Hong Kong stock exchange listing committee took longer than expected to grant a formal listing approval because of a disclosure issue.

Once the okay was in the bag in early June there wasnÆt enough time to launch and complete the offering before the end of the first half and DBS decided to hold off and include another six-months worth of audited earnings into the listing document.

That now in place and a fresh approval from the stock exchange secured last Thursday, Jingkelong is ready to go again. This time its will skip pre-marketing, launching straight into the bookbuilding. The three and a half day retail offering will start on September 12, the price will be fixed on September 16 and the trading debut is scheduled for September 25.

Win Hanverky, which was also brought to market by DBS and was the first Hong Kong IPO after the summer holiday period, is due to start trading today.
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