Chow Tai Fook May Beat Prada to 2011 Hong Kong Record in $2.8 Billion IPO

Chow Tai Fook Jewellery Group Ltd. aims to raise as much as HK$22 billion ($2.8 billion) in what may be Hong Kong’s biggest initial public offering this year as luxury-goods companies tap growing affluence in China.

The jewelry chain with revenue greater than Tiffany & Co., set a price range of HK$15 to HK$21 for the 1.05 billion new shares on sale, according to a prospectus released yesterday. The proposed deal may give Chow Tai Fook a price-earnings ratio almost double Tiffany’s. The Hong Kong-based jeweler, controlled by real-estate billionaire Cheng Yu-tung, will set the price Dec. 9.

“We are confident that the company will continue to benefit from China’s robust retail sales growth in the long term, and we’ll focus on expanding our retail network in Greater China,” Henry Cheng, executive chairman and Cheng Yu-tung’s son, said during a video conference call in Hong Kong yesterday.

The offering will test investors’ appetite as Prada SpA dropped since first trading in June after raising $2.5 billion, including stock sold under the overallotment option, in Hong Kong’s biggest IPO this year. Sales of luxury items in China will more than double to about 180 billion yuan ($28 billion) in 2015 compared with last year, McKinsey & Co. estimates.

The jeweler’s shares will start trading Dec. 15, according to a term sheet.

‘Big Blessing’

Companies have raised more than $16.2 billion from initial public offerings this year in Hong Kong, compared with more than $50.3 billion for the same period last year, data compiled by Bloomberg show. As many as 20 companies plan to offer shares in Hong Kong this month, said Lawrence Fok, chief marketing officer for Hong Kong Exchanges and Clearing Ltd.

Chow Tai Fook, with more than 1,400 outlets in China, forecasts net income of more than HK$6.3 billion in the year ending March 31, according to the prospectus. Earnings per-share on a pro forma basis will be at least 63 Hong Kong cents, it said.

The deal would value the company at 33 times expected earnings, assuming the public offering prices at the high end of its range and only 1.05 billion shares are sold, according to Bloomberg calculations using data from the prospectus. That valuation is higher than local and overseas competitors. Tiffany’s stock is at about 18 times forecast earnings, while Hong Kong traded jewelers Luk Fook Holdings International Ltd. and Chow Sang Sang Holdings International Ltd. are respectively at 14 and 13 times forecast profit.

Founded in 1929 in the southern Chinese city of Guangzhou, the company was named after founder Chow Chi Yuen. “Tai Fook” means “big blessing” in Chinese.

Chow Tai Fook is initially selling 1.05 billion new shares, of which 95 percent will be allocated to an international offering. The remaining 5 percent will go to a Hong Kong public offering that starts tomorrow and ends Dec. 8.

Loan Repayment

The stock being offered will account for 10.5 percent of the company’s enlarged share capital, according to the prospectus. Shareholders, including the Cheng family and company executives, will have the option to sell 210 million shares, as well as the equivalent of up to 15 percent of the new shares being offered via an overallotment option to cover additional demand.

Half of the funds raised by the company will be used to buy raw materials and inventory, 36.5 percent will go toward repayment of loans and 5 percent will be spent on buying properties and renovating stores, according to the prospectus. The remainder will be used to buy production and research and development equipment, build an office in Shenzhen and for working capital.

Cheng said one of the reasons the 82-year-old family-run business is seeking a public listing is to improve transparency and make it more independent.

More Transparency

“The business will be under greater scrutiny from company directors and regulators after the listing, and it will operate in a much more transparent and systematic manner,” Cheng said. “I hope to expand the family business beyond the current generations. Seeking a public listing is the only way.”

Retail sales (TIF) in China climbed and average of 17 percent in the first 10 months of this year, according to government data. Sales will more than double to 40.5 trillion yuan in 2015 from 15.4 trillion yuan in 2010, according to a KPMG report released in April.

In Hong Kong, mainland visitors splurging on high-end shoes, watches and jewelry have driven monthly retail sales to record highs. Chow Tai Fook made 56 percent of its revenue in its last fiscal year in mainland China, with the rest coming from Hong Kong, according to data compiled by Bloomberg.

About 110 companies are seeking approval to list in Hong Kong, according to Fok of Hong Kong’s stock exchange operator. About 40 have permission to go ahead and 10 to 20 companies, mostly from mainland China, are likely to complete their share sales by the end of the month, he said.

Bigger Than Tiffany

Revenue for Chow Tai Fook jumped 53 percent to HK$35 billion, or about $4.5 billion, in the year ending March 31, 2011, while Tiffany’s sales rose 14 percent to $3.09 billion in its fiscal year ended January, according to data compiled by Bloomberg.

The Hong Kong-based company’s gross margin of 28.33 percent was about half that of Tiffany’s, the data show.

Chow Tai Fook has 12.6 percent of China’s jewelry market, and a 20 percent share in Hong Kong and Macau, the company said in its prospectus, citing a report from research firm Frost & Sullivan Inc. It sources rough diamonds from companies including Rio Tinto Plc and Diamond Trading Co., the distribution arm of De Beers.

Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase & Co. are managing the offering.

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net

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