Yi Hua starts IPO as it selectively expands stores

Yi Hua, the operator of department stores and supermarkets in second and third-tier cities on the mainland, begins its initial public tender today offering 90 million shares at HK$1 to HK$1.4 per share up until Friday at noon.

The 18-year-old company, which has most of its business focused in Guangdong, believes that by bypassing first-tier cities it can avoid some of the headaches other mainland mixed retailers have faced.

"We purposely avoid the first-tier cities. The locations we select are the prefecture-level cities that have lots of room for economic and population growth," said Fan Xinpei, the chief executive of Yi Hua.

Each of the businesses that Yi Hua deals in - department stores, supermarkets, furniture and homeware, and electronics - are highly competitive and fragmented markets on the mainland. Yi Hua started its furniture and homeware business this year, stating that it was confident that an expanding middle class and growing disposable income would see an increase in furniture sales.

The optimistic outlook stands in stark contrast to rival Parkson, which is the second-largest mainland department store operator and has locations in many first-tier cities. It reported third quarter results last week that severely underperformed analysts' expectations. Profit decreased nearly 80 per cent from the year before due to increased rental and staff costs. Only one out of nine stores Parkson opened in the last two years has been profitable. Nearly half, or 27 outlets, of Parkson's 57 stores are loss-making.

Last year, Yi Hua reported 43.6 million yuan in net profit. Between 2009 and last year, the company's gross profit increased from 239.8 million yuan to 326.7 million yuan, a compound annual growth rate of 16.7 per cent. The joint bookrunners are Kingsway Capital and Upbest Securities.