Bloomberg News

Chow Tai Fook Said to Test Demand for Biggest 2011 H.K. IPO

November 13, 2011

(Updates with closing share price in seventh paragraph.)

Nov. 11 (Bloomberg) -- Billionaire Cheng Yu-tung’s Chow Tai Fook Group may gauge investor demand next week for a $4 billion initial public offering of its jewelry unit, two people with knowledge of the matter said.

The city’s stock exchange approved the listing plan yesterday, and the luxury retailer aims to list in Hong Kong next month, the people said, asking not to be identified because the information is private. Chow Tai Fook hasn’t decided whether it will sell a 10 percent or 15 percent stake in the unit, one of the people said. The larger stake may raise as much as $4 billion, the person said.

The sale targets almost double the amount raised by Milan- based Prada SpA in the biggest IPO this year in Hong Kong, where surging disposable income in China has helped drive monthly retail sales to a record. The jewelry unit may be valued as high as seven times annual revenue, double what LVMH Moet Hennessy Louis Vuitton SA paid to buy out Bulgari SpA last month, and triple Tiffany & Co.’s market capitalization.

“I doubt if investors are willing to pay them a high premium over rivals,” Patrick Yiu, managing director at Cash Asset Management Ltd., said by phone today.

Chow Tai Fook Group has more than 1,300 stores in Asia and plans to increase the number to 2,000 by 2016, according to the Hong Kong-based company’s website. The jewelry chain has annual revenue of more than HK$30 billion ($3.9 billion), according to the website. Calls to Chow Tai Fook’s Hong Kong office and to its public relations representative Brunswick Group Ltd. today were not answered.

Relative Value

A $4 billion dollar sale would value the jewelry unit at about $26.7 billion, compared with $9.56 billion for Tiffany, according to Bloomberg data. At that price, investors would be paying about 6.8 times revenue, compared with the 3.5 times LMVH paid for Bulgari and the 2.8 times market price to sales ratio for Tiffany, according to Bloomberg data.

Prada, the maker of Miu Miu bags and Church’s shoes, raised $2.5 billion in a Hong Kong IPO in June. The stock rose 1.8 percent to HK$37.10 at the close in the city, about 6 percent less than its offer price of HK$39.50, the bottom of the range.

Coach Inc., the largest U.S. luxury leather goods maker, aims to list in Hong Kong later this month and Graff Diamonds Ltd., a London-based retailer of the gems, is also planning an initial public offering, according to people with knowledge of their plans.

“Retail growth has been very strong and the company’s profitability looks bright,” said Yiu of Cash Asset. “There’s always a strong appetite for luxurious products in China.”

Chinese Shoppers

Hong Kong shopping sprees by Chinese tourists have fueled sales of shoes, clothes and jewelry and driven monthly retail sales to record highs this year and prompted global retails to accelerate expansion.

The growth has prompted retailers to go ahead with share sales even as the outlook for cooling economic growth in China and concern about Europe’s debt crisis has helped drag the benchmark Hang Seng index down 17 percent this year.

“Chow Tai Fook should receive strong demand despite the market volatility,” Steven Leung, a sales director at UOB Kay Hian said today by telephone. “We have not come across a sizable IPO for quite a long time, there is abundant liquidity in the market, especially among long-term funds, and they could quickly snap it up.”

Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase & Co. are managing the IPO for Chow Tai Fook as global coordinators, the people with knowledge of the matter said. Citigroup Inc., Credit Suisse Group AG and UBS AG also will help arrange the offering, they said.

--With assistance from Zijing Wu in London and Mohammed Hadi in Hong Kong. Editors: Dave McCombs, Hwee Ann Tan

To contact the reporter on this story: Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net


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