Banking & Finance

Hair raising

Bawang’s listing is massively oversubscribed. Is IPO fever back?

Faye Wong's flowing locks

Recession creates worry, which can beget bald patches.

So perhaps it should come as no surprise that the hottest initial public offering on the Hong Kong stockmarket so far this year is for a firm that is famous for preventing hair loss.

Bawang, a Guangzhou-based company, is China’s most popular herbal shampoo brand.

Its target market is the millions of middle-aged men who might benefit from hair restoration and anti-dandruff products.

Apparently, demand in this market segment has been increasing at a faster pace than that of the fairer (and normally more shampooed) sex.

Driven by strong institutional orders and rapturous public demand – the retail tranche was 420 times oversubscribed and more than 40 times at the institutional level – the shampoo firm was able to price its initial public offering at the top of the expected price range at HK$2.38 ($0.12).

The IPO should raise $215 million, with the deal valued at 17.5 times this year’s projected earnings.

The enthusiasm is understandable as Bawang has built a multibillion-yuan business. The herbal shampoo market is also growing strongly, according to Euromonitor, and jumped from Rmb956 million ($139.5 million) in 2002 to Rmb2.9 billion in 2007. With a solid 36% market share, Bawang posted net profits of Rmb281.8 million in 2008, well up from Rmb181.3 million in the previous year.

“The shampoo market will continue to grow steadily… even under a relatively unfavourable economic downturn, as a result of its necessity nature,” says Michelle Huang, a Shanghai-based senior analyst at Euromonitor.

Eager to capitalise, the mainland shampoo maker plans to spend 30% of the IPO proceeds on brand promotion. The firm already uses action movie star Jackie Chan as a spokesperson but it is expected to pay Rmb20 million for pop singer Faye Wong to endorse its upcoming range of products for women.

But there are challengers to Bawang’s growth. Proctor and Gamble, which already owns the top three products in the conventional shampoo market in China (Bawang ranks fourth) is also eyeing Bawang’s promising niche. The world’s largest maker of household products is now developing its own herbal shampoo to be released under its Rejoice brand.

But the significance of Bawang’s IPO goes beyond the company itself. The massively oversubscribed deal is a throwback to a more bullish era when hot China IPOs were common.

Are the happy days back again? In WiC21, we looked at the resumption of IPO activity in China – with listings in Shanghai and Shenzen having been banned for almost 11-months. The first deal to hit the market is Guilin Sanjin Pharmaceutical, which priced on Monday.

Though not a huge transaction – the Shenzhen float will raise just Rmb630 million ($92 million) – it was 165 times oversubscribed. This suggests that investor sentiment remains bullish.

Indeed, initial gains by several mainland companies that listed recently in Hong Kong have all been promising: Lumena Resources Corp, China Metal Recycling and furniture maker Hing Lee gained 19%, 22% and 39% respectively on their debuts.

There are reasons for investors to be optimistic. China’s consumer sector has remained largely robust with retail sales continuing to expand. In May, retail sales were up 15.2% year-on-year, compared to 14.8% in April. Auto sales were up 34% in the same month. Clothing, furniture, and cosmetics all reported robust sectoral growth that exceeded 20%.

Meanwhile, share prices in both Hong Kong and China have been rising. Hong Kong’s benchmark index is up about 30% since the beginning of the year, and the Shanghai Composite Index is up 60%.

Bawang begins trading July 3.


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