Loans mar outlook for listing offer of IT
Upbeat market sentiment on retail and consumer plays bodes well for the imminent US$75 million listing of fashion retailer IT, but analysts expressed caution yesterday over corporate governance risks associated with the company.
Prospects for the company are generally seen as promising. IT's retail sales have consistently outpaced the sector average, and the firm has posted average annual profit growth of 38 per cent over the past three years.
But the firm has shown an unwelcome proclivity for sweetheart lending to its directors.
As of August last year, IT had advanced $98 million to the two founding directors, Sham Kar-wai and Sham Kin-wai, and companies controlled by them.
According to a research report issued by CLSA, which is leading IT's listing, no interest was payable on these loans. The firm has also issued corporate guarantees amounting to $42 million for bank loans to companies controlled by the two directors.
Even though the Sham brothers have agreed that all sums advanced to the related companies will be repaid by the end of this month, and the lending banks have agreed in principal to release the corporate guarantees provided by the IT group upon listing, analysts frown upon such connected lending.
'Companies should not be lending money to their directors. In the IT group's case, the practice is especially galling since the company had been raising expensive funds through convertible bonds to finance its activities,' CLSA said in the report. 'This would not have been necessary had the company not been lending to the brothers' companies.'
Strategic Capital Management Growth Fund, a venture capital fund, invested US$5.2 million in IT in the form of a convertible bond in March 2000 and owned a separate US$4 million convertible note with 7 per cent annual interest.
The fund has converted all the outstanding convertible notes into 77.9 million old shares, or 10.39 per cent of IT, and plans to reduce its stake to 2.3 per cent after the listing.
IT hoped to raise US$75 million in the initial public offering, with proceeds to fund expansion in the mainland and Taiwan, market sources said.
CLSA projects the company's sales and pre-exceptional profit to rise by 25 per cent to $1.05 billion and to $105 million, respectively, for the year to February 28. It values IT shares at 15 to 16 times estimated earnings for the period.