Bag maker faces weak market

PUBLISHED : Thursday, 24 November, 2011, 12:00am
UPDATED : Thursday, 24 November, 2011, 12:00am


The Hong Kong initial public offering of Sitoy, a handbag manufacturer for Prada and Coach, may draw a lacklustre response from the market, as investor enthusiasm for the luxury sector withers.

The company is seeking up to HK$986 million in a listing next month, to expand its manufacturing capacity and retail business. Sitoy is offering up to 249.6 million new shares at HK$2.95 to HK$3.95 per share, according to a term sheet for the deal.

Prada earlier agreed to buy 19.6 per cent of the shares. However, Coach, another big customer of Sitoy, was not a cornerstone investor.

Teras Yeung, chief executive of Sitoy, did not comment on Coach's position. But he said Sitoy's retail arm, Tuscan's, would not compete with Sitoy's existing clients in terms of shop location and market position.

'We won't open a Tuscan's shop in the same shopping mall as Prada or Coach,' Yeung said. He said he was not worried about losing the long-term relationship with Coach, which started commissioning Sitoy to manufacture its handbags in 1998.

Founded in the 1970s, Sitoy is one of the largest outsourcing manufacturers for luxury handbags and small leather goods in the world, with a capacity for 16 million items per year. The company reported revenue of HK$2.5 billion for the year to June and net profit of HK$302 million, according to a filing with the Hong Kong Stock Exchange on Monday.

The company expected a net profit of at least HK$175 million for the six months to December this year.

It also produces for high-end brands Fossil, Lacoste, Michael Kors and Tumi.

In February, the manufacturer acquired the Italian handbag brand Tuscan's and started its own retail business. By the end of October, it had set up seven retail stores and nine department store counters on the mainland and set a target to open a total of 100 retail outlets over the next three years, including a new shop in Tsim Sha Tsui next month.

The price range of Tuscan's main leather products will be HK$1,500 to HK$2,500, lower than Prada's and Coach's, he said.

Yeung said manufacturing would continue to be the group's main source of revenue. But he said Sitoy would continue to expand its retail business. It would also look for opportunities to acquire foreign brands to accelerate development of its retail business, Yeung said, adding that he was bullish about the mainland consumer market.

But analysts said investors might not warm to luxury-related stocks, which have performed weakly recently. 'Luxury-related companies are not as attractive as they were in the capital markets during the first half of this year,' said Elyse Wang, retail analyst of Haitong International Securities. She said the sluggish global economy and inflation on the mainland had cast a shadow over the booming retail sector on the mainland in the second half.

'As an outsourced manufacturer, Sitoy Group would be less defensive than retailers in an adverse economic environment because it's harder for the manufacturer to transfer its cost to others,' Wang said.

Yesterday, the share price of Italian fashion house Prada closed at HK$33.40 per share, down 15 per cent from its listing price of HK$39.50. Milan Station, the seller of second-hand luxury bags, which drew a record oversubscription in its listing in May, has dropped 16 per cent from its issue price, closing at HK$1.40 yesterday. And luggage maker Samsonite has plunged 33 per cent since listing in the city in June.

'The company [Sitoy] hopes to boost its profit margin by launching its own retail business, but usually a new business will hardly contribute any profit in the first three years,' Wang said.

Ben Kwong Man-bun, chief operating officer of KGI Asia, said the value of Sitoy should be higher than that of other outsourcing manufacturers, whose price-earnings ratios usually range between five and six.

'As a manufacturer of luxury goods, the company has a higher gross margin than producers for mass brands,' he said. 'But of course it will be much lower than that of luxury brand operators or retailers.'

Kwong also said the listing of Sitoy was smaller than that of a number of other companies, such as Haitong Securities, Chow Tai Fook Jewellery and New China Life Insurance, which also plan to list in Hong Kong next month.

'So many IPOs ahead may distract investors' attention from Sitoy,' he said. Sitoy will open share subscriptions today and makes its trading debut on December 6.