The initial public offering of Time Watch Investments, a mid-priced watchmaker listed in Singapore before being privatised in 2011 and now tapping into the Hong Kong market, is a play on domestic Chinese consumption but the company's rising inventory could be cause for concern.
The dual themes of urbanisation and domestic consumption have returned to the spotlight in China of late, with top policymakers in Beijing repeatedly sending a clear message that the government wants these to be the new growth engines.
A key question is whether the watchmaker, controlled by chairman and founder Michael Tung Koon-ming, will be able to tackle in timely fashion a rise in inventory, which represented about a third of its sales level last June.
According to its listing prospectus, the company's inventory turnover days - the number of days it takes it to sell the inventory on hand - rose to 231 for the year to June last year, from 197 days the year before. Operating cash flow dropped sharply to HK$4.7 million from HK$75.2 million for the same period.
Bad debts rose 35 per cent to HK$314.2 million in 2012 from HK$233.2 million, raising the possibility of provisions for impairment losses.
The prospectus attributes an increase in cash and cash equivalent on its balance sheet to a slew of financing activities for the first six months of last year, which resulted in cash-on-hand of HK$104 million.
Like many small private enterprises that have listed, Time Watch plans to introduce a bold expansion strategy to tap into the rising middle-class market by opening 38 directly managed Tian Wang own-brand stores in first-tier cities by 2015.
But it plans to consolidate the overall sales network in lower-tier cities, bringing down the number of stores to 200 in 2015 from 260 at present.
Last year, total retail sales on the mainland advanced 14.3 per cent from the previous year to 20.7 trillion yuan, though the pace of growth slowed.
Retail consumption in urban areas expanded 14.3 per cent from a year earlier to 17.9 trillion yuan, while rural spending rose 14.5 per cent to 2.8 trillion yuan.
Although the company's fundamentals may not be rock solid, thanks to the prevailing market mood, companies that have listed since December have gone up in value by an average 15 per cent.
Established in 1988, Time Watch, which manufactures and retails domestically made Tian Wang and latterly Swiss-label Balco from 2001, plans to raise up to HK$810 million from an offering of 600 million shares, representing 30 per cent of its enlarged share capital.
The shares are being offered at a price range of HK$1.11 to HK$1.35 each, translating into a price-earnings ratio of 7.7 to 9.3 times based on this year's forecast earnings.
The company has secured cornerstone investment of US$240 million from hedge fund Orchid with a six-month lock-up period. The share will be priced on January 29.
The average price of a high-end Tian Wang watch is HK$7,000 while an average Balco sells for nearly HK$4,000. A middle-income family on the mainland earns between 60,000 yuan and 500,000 yuan a year.