Times targets $113 million from Hong Kong IPO

The Chinese supermarket operator steps up to raise fresh equity capital after an earlier agreed deal with Wumart is cancelled.
Times Limited, a Chinese hypermarket and supermarket operator, launched the roadshow yesterday for a Hong Kong initial public offering, which aims to raise up to HK$880 million ($113 million).

The IPO has come about after the cancellation earlier this year of a deal with its larger Beijing-based competitor Wumart Stores that would have provided Times with immediate access to the capital markets û thus enabling it to raise funds for expansion. A listing in its own right will essentially replace those potential funds.

According to an agreement between Times and Wumart in August 2006, the latter was to acquire a 50% stake in Times for HK$1.14 billion ($146 million) from its controlling shareholder CS International, payable half in cash, half in shares. The cash portion was to be raised partly through a placement of new H-shares.

However, in November, Wumart suspended trading of its shares and a couple of days later it announced that its former chairman had been detained to assist in an investigation by the Chinese authorities and that the placement was off. Then in April this year, Wumart and Times agreed to terminate the share acquisition agreement as the suspension and the cancellation of the placement meant that it had become highly uncertain whether Wumart would be able to raise the necessary funds for the acquisition.

Wumart continues to operate as normal, but has yet to resume trading.

Times operates primarily in the eastern part of China, with the Jiangsu province being its main market. It also has operations in Shanghai and in the Zhejiang, Shandong and Anhui provinces. By the end of 2006, it had 52 stores, of which 32 were hypermarkets and the remaining 20 supermarkets.

The company has a somewhat special business model whereby it leases part of the ground floor of its stores to other parties. This generates a considerable amount of income, which helps to cover a lot of its own expenses.

Compared with peers such as Wumart and Hong Kong-listed Lianhua Supermarket, the business operations of Times are much smaller scale. By the end of last year, Wumart operated 66 self-owned hypermarkets and 126 self-owned supermarkets, while Lianhua had 104 hypermarkets and 625 supermarkets.

Times is offering 210.6 million new shares, equivalent to 25% of its enlarged share capital, at a price ranging from HK$3.60 to HK$4.18. A 15% greenshoe could further increase the deal size to $130 million. HSBC is the sole bookrunner.

The price range values the operator at 16.3 to 18.6 times its 2008 earnings. This puts it at a discount to Lianhua, which was trading at a 2008 price-to-earnings multiple of 20.5 yesterday, according to Bloomberg data.

LianhuaÆs share price has fluctuated quite a bit in the past few months. From mid-December last year it surged around 29% to reach a record high of HK$11.20 in mid-January, but immediately embarked on a downtrend which saw it loose as much as 17%. Only recently has it been climbing back to the HK$11 level and yesterday it closed at HK$11.30.

In addition to the PE, though, one should also look at sales growth when comparing hypermarket and supermarket operators, one analyst argues. The reason is that net margins are usually very low, making top line growth a key indicator of their performance.

Times posted a 19% increase in revenues in 2005 to Rmb2.4 billion, and another 20% in 2006 to Rmb2.8 billion ($362 million).

Its bottom line grew at a compound annual growth rate of 28.8% in the same period, which is slower than Wumart but faster than many of its other peers. Its recorded a net profit of Rmb56 million in 2005, which then improved by 39% to Rmb78 million in 2006. According to a syndicate research report, the company is projecting 33% growth in net profit to Rmb104 million this year.

Expansion of its operating sales area will be the key growth driver and according to one source the companyÆs future plans include ôa huge, very aggressive growth strategy.ö

Times is looking to open 18 new stores in 2007 and 2008, targeting existing as well as new cities in eastern China. The company will also be converting some supermarkets into hypermarkets as its markets become more mature, and is thinking of establishing distribution centres to free up space at its hypermarkets currently occupied by inventories. The aim of such an exercise would be to further increase its sales area.

It is believed that its margins will continue to expand as its stores continue to mature.

The China consumption growth story is not only popular with investors, but with international retailers too. Consequently investors should be aware of the increasing competition from foreign names.

As for supermarkets, international players like Carrefour are rapidly expanding their business in China. Carrefour, which set up its first Mainland outlet in 1995, now runs more than 80 stores and will undoubtedly continue to expand its business. Other international players with big brand names will also continue to move into ChinaÆs retail market and pose threats to the local players.

ôWhile the market will definitely continue to grow, the sector remains very competitive,ö says a sector analyst.

TimesÆ offering has the usual structure with 90% of the issue going to the institutional tranche and 10% to retail investors. It also has a standard clawback mechanism that may increase the retail tranche to as much as 50% in case of heavy oversubscriptions.

The proceeds will mainly go towards business expansion, although part of the money will be used to repay borrowings from HSBC. The final price will be determined on July 6 and the trading debut is scheduled for July 16.
¬ Haymarket Media Limited. All rights reserved.
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