Global Economics

Xtep Guns for Nike and Adidas


China's second largest sportswear brand launches an IPO in the hopes of "producing more and selling more" to cash in on Olympic fever

With only 84 days to go before the Beijing Olympics, China's second largest fashion sportswear company, Xtep International, is stepping up its game with the launch today of an initial public offering that aims to raise between HK$2.23 billion and HK$3.03 billion ($286 million to $388 million).

Sources say 80% of the money raised will be used to "produce more and sell more" by increasing the company's production capabilities and distribution network, and engaging in promotional activities to strengthen the brand.

Based on feedback from one week of pre-marketing, the price range has been set at HK$4.05 to HK$5.50, which will result in a market capitalisation of at least $1.14 billion at the time of listing. Xtep is selling 25% of its share capital by issuing 550 million new shares. There is also a 15% greenshoe, which could increase the total deal size to as much as $446 million.

As usual, 10% will be set aside for retail investors, although standard clawback triggers are in play and could increase this portion of the deal to as much as 50%. The listing is being organised by JPMorgan and UBS.

Xtep is a leading company in China's sportswear sector. Founded in 1999 as an original equipment manufacturer, the company now designs, manufactures and distributes its own clothing and footwear. In 2008, it is expected to report 112% year-on-year growth in net profit, bringing its bottom line to Rmb471 million ($67 million).

Although the company had only a 3.4% share of China's overall sportswear market in 2007 – behind competitors Li Ning and Anta, which have a 9.3% and 7.4% share respectively – it is strong in the fashion sportswear segment of the market. Here it has an 18.9% market share, close behind market leader Kappa, which is owned by China Dongxiang Group and controls 22% of the market. And fashion sportswear is a fast-growing business: between 2008 and 2012 this segment is expected see compound growth of between 38% and 40%, while the overall sportswear market is expected to grow at a much more modest 25%-26%.

Furthermore, domestic sportswear companies are overtaking international brands, including Nike and Adidas, in terms of market share. In 2007 domestic companies had a 52% share, up from 42% in 2005.

One source points out that Xtep might be disadvantaged by its positioning at the low end of the market (its products are priced at between Rmb150 and Rmb300, or $10 to $20). "Competition will become very tough in the low-end sports sector. It is hard for these companies to differentiate themselves in terms of price and quality," says the source.

It is important to remember that Xtep is not only competing with other big brands, but also the numerous small brands and unbranded products that occupy 55% of the market.

Like many other Chinese retail companies, Xtep is aiming to become a manager of multi-brands and in 2007 it launched two new brands alongside its main Xtep brand: Disney Sport, a line licensed from Disney, and Koling, an upmarket brand targeting high-income earners.

A syndicate research report predicts that these two brands will see 418% year-on-year sales growth in 2008 to Rmb310 million, representing 12% of total revenues. This could counteract a potential drop in the sportswear sector after the Olympics.

"While year-on-year growth in sales of the Xtep brand is expected to slow down slightly after the Olympic Games in 2008, its negative impact on the company's top-line products will be smoothed out by the rising contribution from Disney Sport and Koling," says the report.

The same research report projects that Xtep's retail network of branded stores will increase to about 5,180 by the end of 2008, up from just under 4,400 in 2007, with a further expected increase to about 5,880 in 2009. Xtep will, however, still be behind Li Ning, which is expected to have 6,900 stores by 2009.

"We prefer Xtep's approach of expansion at a paced rate such that the capital expenditure is smoothed out and ensures working capital needs are satisfied," says the report.

According to sources close to the deal, the price range values Xtep at a 2008 price-to-earnings ratio of 17 to 23 times. This makes the company look relatively cheap compared to its two major domestic rivals, Li Ning and Anta, which according to Bloomberg are currently trading at 34.8 times and 27.5 times, respectively. The valuation is looking less generous versus China Dongxiang, which yesterday closed at a 2008 P/E multiple of 21.

Xtep's final price will be determined on May 27 and the trading debut is set for June 3.

When Anta Sports Products listed in July last year, it managed to raise $406 million, with the price fixed at the top of the indicated range and demand so high that it brought into play the full 50% clawback for retail investors. The Anta listing, however, occurred in a more buoyant market and at a time when there was an expectation that sportswear companies would benefit from the run-up to the Beijing Olympics. Investors looking at Xtep may want to consider how much of the Olympic fever will have time to rub off in the next 84 days.


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