Bloomberg News

Sun Art Gains on Debut, Defying Slump in New Equity Demand

July 27, 2011

(Updates with closing share price in second paragraph.)

July 27 (Bloomberg) -- Sun Art Retail Group Ltd. jumped on its first day of trading in Hong Kong, defying a slump in demand for new equity that caused at least seven companies to cancel or delay initial share sales in the past three months.

China’s largest hypermarket operator climbed as much as 47 percent to HK$10.58 before closing at HK$10.12. It was the biggest first-day advance in Hong Kong in two years.

The retailer, backed by France’s Groupe Auchan SA, lured investors after saying it will focus on smaller Chinese cities with increased opportunities for growth and cheaper real estate than in Beijing or Shanghai. Sun Art, which competes with Wal- Mart Stores Inc. and Carrefour SA in China, has obtained more than 120 sites for hypermarket complexes in the world’s fastest- growing economy.

“While the market environment has not been that good this year, the consumer sector has performed pretty well,” Chang Dongliang, a Shanghai-based retailing analyst with Everbright Securities Co., said by phone today. “Supermarkets sell everyday necessities, so the industry is not as affected by macro factors, and Sun Art is the market leader.”

The Hang Seng benchmark index slid 0.1 percent today compared with Sun Art’s 41 percent gain from its offer price of HK$7.20.

Net Proceeds

Sun Art’s debut countered a weakening market for initial public offerings. Prada SpA ended its first day on June 24 little changed after pricing near the low end of a targeted range in Hong Kong’s biggest initial share sale this year.

China Everbright Bank Co., which delayed its IPO in June, is seeking more institutional buyers after getting commitments for about one third of the offering from key investors, two people with knowledge of the deal said July 22.

Shanghai-based Sun Art raised HK$8.2 billion ($1.1 billion) and became the second of six Hong Kong IPOs raising at least $1 billion this year, after MGM China Holdings Ltd., to price at the top of a marketed range, according to data compiled by Bloomberg.

Net proceeds from Sun Art’s IPO were about HK$8 billion, half of which will be used to open stores in China, where it has 197 hypermarkets under the “Auchan” and the Ruentex Group’s “RT-Mart” brands. The company plans to open 48 stores in China this year, according to Executive Director Peter Huang.

Auchan and Ruentex, which includes Taiwanese companies Ruentex Development Co. and Ruentex Industries Ltd., together hold a controlling stake in Sun Art, according to the prospectus.

New Stores

Sun Art will focus its expansion in “populous second- and lower-tier cities” it said in its prospectus. Retailing in cities such as Beijing and Shanghai is “relatively mature” and space for large formats such as hypermarkets “remains scarce,” it said.

The industry’s sales may double to 911 billion yuan ($141 billion) in 2015 from 447 billion yuan last year, according to Euromonitor International.

Wal-Mart, the world’s biggest listed company by sales, has 339 stores in more than 120 Chinese cities and may keep buying land in anticipation that more people in the nation of 1.3 billion will move into cities where it plans to expand, according to Ed Chan, chief executive officer of the company’s China operations.

“The sales performance of most retailers benefits from both price as well as volume increases,” BNP Paribas analysts led by Michele Mak said in a July 22 note to clients. “China has really entered into the golden period for consumption since 2010.”

‘Robust’ Growth

The growth of China’s urban population and its middle class will be “quite robust” in the next 10 to 20 years, Chan has said.

Sun Art postponed its trading debut from July 15 because historical earnings-per-share figures failed to account for a stock split that took place before the IPO.

The company last year had a 12 percent market share in China among operators of hypermarkets, or retail outlets with selling space of more than 2,500 square meters (27,000 square feet) that primarily sell groceries, according to data from London-based researcher Euromonitor.

Wal-Mart ranked second with an 11.2 percent market share, China Resources Enterprises Co. had 9.8 percent and Carrefour 8.1 percent, according to Euromonitor.

Largest Grocery Market

China’s hypermarket industry may grow at a 15 percent compounded annual rate in the next five years, Bruno Mercier, chief executive officer of Sun Art, said at a July 3 briefing. It expanded at a 19 percent annual rate in the previous five years, Sun Art said in a July 3 statement.

Wal-Mart expects China to be the world’s largest grocery market by 2014. The Bentonville, Arkansas-based retailer has annual revenue of $7.5 billion in China, Scott Price, chief executive officer for Asia, said in March. That compares with $8 billion in Japan and less than $1 billion for India.

Sun Art opened its first store in Shanghai in 1998 and Boulogne-Billancourt, France-based Carrefour started in China in December 1995. Wal-Mart and Dusseldorf-based Metro AG, Germany’s biggest retailer, arrived in 1996 while Auchan of Croix, France, began in 1999 according to the companies’ websites.

--With assistance from Alex Kim and Stanley James in Hong Kong. Editor: Paul Gordon

To contact the reporter on this story: Michelle Yun in Hong Kong at myun9@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net


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