By Sharon Lam
(The author is a Reuters Breakingviews columnist.)
HONG KONG, July 17 (Reuters Breakingviews) - The biggest women's shoe seller in China is trying some fancy financial footwork. Just two years after being taken private in a $6.8 billion deal, Belle International has unveiled plans for an initial public offering of its 8,300-store athletic-wear chain, Topsports International. Investors should watch their steps.
Topsports already has a head of steam. Its revenue grew 23% in the year to February, and after adjusting for a hefty stock compensation bill in 2018, the bottom line grew at about the same pace. A 6.8% margin also compares favorably against rival Pou Sheng , for one, which pockets only a little more than 2 cents for every dollar of sales.
Much of the success at Topsports can be traced to Nike and Adidas . The duo accounts for almost 90% of sales. Foreign brands command a premium in China, but it is a precarious time to be so heavily dependent on them. Consumer boycotts come out of the blue and can spread quickly on mainland social media. Just ask Canada Goose , whose stock suffered amid a tangential Huawei-related backlash last year. There's also no telling what tactics might get used in a prolonged and hostile trade war.
An apparent emphasis on bricks over clicks is another concern. When Belle agreed to sell to private equity firms Hillhouse Capital and CDH Investments, management flagged "unprecedented challenges," primarily from online rivals. And yet e-commerce does not feature prominently in the Topsports IPO prospectus. Meanwhile, Nike is increasingly selling directly to Chinese consumers online.
That complicates any valuation analysis. Pou Sheng, which runs YY Sports, Anta Sports Products and clothing retailer Giordano International trade on average at 15 times their expected earnings for the next 12 months. If Topsports grows net profit by about a fifth again, to around $380 million, that multiple would imply it is worth almost $6 billion - but only if investors are also willing to take their eyes off the e-commerce ball.
- Chinese footwear retailer Belle International on June 27 filed plans to spin off its sportswear business, Topsports International Holdings. The deal could raise $1 billion, Reuters reported, citing unnamed sources.
- A group led by Hillhouse Capital and CDH Investments took Belle International private in July 2017.
- Bank of America and Morgan Stanley are joint sponsors of the Topsports offering.