To say that Hong Kong’s IPO market is lacklustre at the moment would be an understatement. At least six companies have withdrawn or postponed their initial offerings in the last month; others have priced their IPOs at the low end of their ranges, as the benchmark Hang Seng Index sinks to a nine-month low.
But the gloomy sentiment hasn’t stopped Sun Art Retail Group from pushing ahead with its own $1.1 billion listing, one of the largest Hong Kong offerings in the retail sector this year. It announced this week that it had managed to secure nine cornerstone investments totalling $420 million, or 40% of the offer, says the Wall Street Journal.
Sun Art, a joint venture between France’s mass retailer Auchan and Taiwan’s Ruentex group, operates 197 hypermarket malls under two brands – Auchan and RT-Mart – in more than half of China’s provinces. Last year Sun recorded Rmb56.2 billion in net sales (ahead of Carrefour and Walmart) and made Rmb1 billion in profit attributable to shareholders, according to its IPO prospectus.
Buying into the fast-growing retailer is not going to be cheap. The Shanghai-based company will sell 1.14 billion new shares for HK$5.65 to HK$7.20 each, which represents a price-to-earnings ratio of 24 to 31. By comparison, Lianhua Supermarket Holdings, owner of 5,172 supermarkets and convenience stores in China (albeit many of them much smaller than RT-Mart’s hypermarkets), is trading at 22 times. Even Walmart, the world’s largest retailer, is trading at a significantly lower price-to-earnings multiple of 11.7, primarily due to slower growth for its overall business.
The key to the strong investor interest, analysts say, is Sun’s market position. “The company is a pure-play China consumption story and is viewed as ‘best-in-class’ compared to other listed Chinese companies in the same sector,” says FinanceAsia.
How did the much bigger brand of the two – RT-Mart – get into this position?
Unlike Walmart and Carrefour, which target the country’s more affluent cities, it followed one of Chairman Mao’s strategems, says Liu Shengjun, deputy director of the China Europe International Business School in Shanghai. “Using the countryside to encircle and capture the cities” was one of its business principles, he told the Economic Observer. (RT-Mart can’t claim to be unique here: WiC scratches its head on the number of rabid capitalists who cite China’s most revered Communist as their commercial inspiration).
In part, it was a practical move. Entering China in 1998, it opted to avoid the bigger coastal cities. RT-Mart tried its luck in the provinces. Offering discounts on everything from eggs to televisions, it began to pull more shoppers into its stores. It wasn’t until 2009 that it opened its first store in Beijing, and has since grown a large presence in Shanghai, where it has 21 stores.
Rumours about a potential IPO began as early as 2005. Analysts say this was pushed back because Auchan was reluctant to sell its crown jewel. But the French company seems to have been persuaded by a new offer from Ruentex. The latter has a controlling share and gave Auchan more shares in the listing vehicle.
Ruentex also seems to have been more anxious to get the listing off the ground, to fund RT-Mart’s battle for more market share. Bloomberg says the company has 51 store locations under development, which are expected to begin operations next year. Sun had 12% of the market last year, squeaking in front of Walmart’s 11.2% share.
Analysts say the funds raised from the IPO will help Sun Art finance this expansion drive, especially in the construction of new hypermarkets in smaller, urban centres.
“We will strive to further strengthen our market position by continuously expanding our retail network,” Bruno Mercier, chief executive of Sun Holding, said in a statement. HSBC is one of the bookrunners of the offering.
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