Source:
https://scmp.com/article/979212/shaky-markets-fail-halt-shoemakers-ipos

Shaky markets fail to halt shoemakers' IPOs

People need shoes come rain or shine. And that may explain why two manufacturers are launching their initial public offerings this week despite a global stock market rout.

Active Group Holdings, one of the largest men's casual footwear manufacturers on the mainland, kicks off its HK$549 million IPO today. This followed the IPO rolled out earlier this week by Hongguo International Holdings, the second-largest mid-to-premium women's footwear manufacturer, which was about three times bigger.

At first glance, the women's footwear firm may appear more attractive than the men's, as the former group is more addicted to purchasing shoes. Retail sales of men's footwear on the mainland were 84.9 billion yuan (HK$103.6 billion) last year, while for women's shoes they were 119.1 billion yuan.

But in terms of profit margins and valuations, Fujian-based Active Group was preferable to Hongguo, said Steve Cheng Ka-wah associate director of Shenyin & Wanguo Securities. 'Active Group has its niche as the first men's footwear company listed in Hong Kong and it has higher profit margins and a lower valuation,' he said. 'When the market is plunging and many big state-owned firms or blue chips are at bargain prices IPOs have to be more practical in pricing.'

Active Group priced its shares from HK$1.20 to HK$1.83 apiece, which translates to 10.9 to 16.6 times its earnings this year, while Hongguo is at 13.5 to 19 times earnings.

Sources said yesterday the institutional tranche for Active Group, accounting for 90 per cent of total offered shares, had been fully covered.

The net profit margins of Active Group were higher than Hongguo's because the business model used for men's shoes was different from that used to sell women's shoes. Men's footwear firms relied on distribution agents and department stores, while women's companies relied on their own sales outlets, which weigh on the operating profit margins due to rent and refurbishment costs.

Active Group has more than 1,500 sales outlets nationwide, which are operated by distribution agents and department stores. Hongguo runs a network of 1,015 proprietary outlets and 344 third-party outlets.

Active Group, however, planned to open 25 flagship stores by 2013 in major cities, which will increase operating costs in the next few years.

'We feel that it's worth it to do so,' Chan Yuanjian, Active Group's chief financial officer, said. 'The investment in the new stores could be considered as brand building and advertising expenses.'

The company said increasing brand awareness could help raise shoe prices. The wholesale price rose to 155 yuan last year from 115 yuan in 2008. Retail prices of their footwear are between 200 yuan to 1,000 yuan.

Active Group projected its net profit will increase to 111.5 million yuan this year from 71.3 million yuan last year, up 56 per cent. Around 30 per cent of its net proceeds will be used for setting up flagship stores and 30 per cent will be used to establish a new factory in Jiangsu. The rest will be used for research and marketing.

Demand for shoes was inelastic, which means people would not cut back their spending on shoes if their incomes fell or shoe prices rose, said Undercover Economist, a Financial Times blog.

This helps explain the 10 per cent annual growth in women's footwear sales on average between 2007 and last year, and the 12 per cent average growth on the mainland.

For men's footwear sales, it is projected that sales will grow to 143.9 billion yuan in 2015 from 84.9 billion last year, representing an 11.2 per cent on average rise each year, according to the Active Group prospectus, which quoted Euromonitor International, the consumer market research company. Casual footwear, which accounts for half of the total men's footwear sales, will grow at a faster rate of 11.6 per cent on average in the next four to five years.

Still, there is uncertainty in Hong Kong's IPO market, which has been dormant for more than a month. In addition, there is the sluggish secondary share placement by their biggest competitor, Belle International, last week, which was forced to price its shares at the lower end of its indicative price range.

But Nanjing-based Hongguo said it was confident about its IPO, banking on robust retail demand on the mainland. As the major player in the mid-to premium women's footwear market, Hongguo said it would ride on the demand for upgrading shoes as individual incomes increased.

'Almost all mainland women's hands are beautiful, but when you look down to their feet, there will be a great disparity,' said Li Wei, president and executive director of Hongguo International.

That is because low- and middle-range shoes still soak up a vast proportion of the total market. Low-end pumps, which cost below 300 yuan a pair, account for more than 40 per cent of total sales in women's footwear, according to the prospectus, again quoting Euromonitor. Middle-range pumps, priced at 300 to 600 yuan, take up a little more than 30 per cent. Meanwhile, mid-to-premium pumps, priced 600 to 2,000 yuan, account for around 28 per cent.

70%

The increase in net profit Hongguo expects this year to earn not less than 287 million yuan

- Active sees a 56% rise to 111.5 million yuan