Tailor-made offering, profits make material difference

PUBLISHED : Monday, 05 December, 2011, 12:00am
UPDATED : Monday, 05 December, 2011, 12:00am


China Outfitters is an excellent example of how an attractive company can come back from a failed deal. The issuer at time of writing had covered its initial public offering and was preparing to price the deal.

It was a much different outcome from the one seen in June, when the firm tried and failed to bring a US$340 million deal to the Hong Kong exchange.

That offering was pulled largely due to market conditions. The Greek crisis was in full swing then, and luggage maker Samsonite - another consumer goods company - was trading poorly at the time.

But while some deals are getting done, market conditions are not exactly pristine these days, so what has changed for China Outfitters?

First, the offering was trimmed, representing the equivalent of a more digestible US$145 million.

Second, valuation was cut, too. The revamped deal, offered at a fixed price of HK$1.64 per share, saw the company's value trimmed to a price-earnings ratio this year of about 11.5 times. (Its June listing attempt was marketed at a price-earnings ratio of 14 to 19 times.)

Third, with much of the groundwork already carried out last summer, bookbuilding and the management roadshow were slashed from the usual two weeks to just four days, to achieve as much momentum as possible with investors.

Fourth, a sizeable cornerstone investor tranche was assembled, with Everbright Private Equity, KKR China Apparel and the Sequoia Funds taking a combined stake making up half of the deal. Their commitments would not be protected in the event of reallocation of stock from the institutional tranche to the retail offer (also known as a 'clawback').

The company, which has operated for more than a decade and is part-owned by private equity group Orchid Asia, is involved in the design and manufacturing of casual menswear and accessories under the brand names Jeep and Santa Barbara Polo and Racquet Club. Its stable also includes Sideout, Hallmark, and trench-coat specialist London Fog.

The casual menswear segment is fairly concentrated on the mainland, with the top 10 brands accounting for almost 50 per cent of sales. China Outfitters battles with names such as Levi's or Zara, which dominate mainland shopping malls.

To do this, it sells its clothes in about 900 outlets, 400 of which are self-operated. Growth is healthy: net profit increased 191 per cent from 2008 to last year and by 25 per cent this year. Margins have improved and the balance sheet is also sound.

While UBS remained the sole sponsor of the deal, it was joined by no fewer than four other brokers, including BOC International, Daiwa, ICBC and RBS, the company ensuring no stone was left unturned throughout the marketing process. The stock starts trading on Friday.

Philippe Espinasse was an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press