China Eratat Sports Fashion IPO

China Eratat Sports Fashion is offering new shares at 0.30
a) 8,000,000 shares to public
b) 155,000,000 shares by placement

The company is a branded sportswear enterprise based in Fujian Province, PRC, with a strong focus on brand management, product development and quality. They are principally engaged in the design, manufacture and distribution of sports footwear, and the design and distribution of sports apparel, which are mainly marketed under proprietary brand, ERATAT (鳄莱特 ).

The products are categorized under two segments – sports footwear and sports apparel. They have engaged Wong Lee Hom, a well-known international artiste as brand ambassador since 2002. They have also won some awards like 2006 China Best Public Image Brand and 2006 China Top 100 Footwear Producing Enterprise.

Competitive strength

(a) Established track record and reputable brand
(b) Extensive distribution network across the PRC
(c) Strong emphasis on quality products
(d) Strong product development capabilities
(e) Experienced, dynamic and committed management team

Industry prospect

(a) Increasing consumer consumption and sophistication in the PRC, particularly in the mass-market consumer segment
(b) Rising emphasis on sports and leisure-centred lifestyles in the PRC
(c) Strong growth potential of our ERATAT brand and products

Future plans

(a) Expand production facilities
(b) Expand market presence and distribution network
(c) Strengthen the brand through promotion and marketing
(d) Enhance product development
(e) Strategic tie up and investment

Key risks

(a) Highly competitive sports fashion footwear industry
(b) Reliant on the brand ERATAT
(c) Infringement of intellectual property
(d) Retailers of ERATA products face rising competition for retail space
(e) Dependent on PRC distributors
(f) Labor shortage and rising cost

Statistics

NAV after ipo : 13.51 cents
Hist EPS on 290,029,357 shares : 2.7 cts
Hist PE : 10.8
Hist PE base on post ipo 414,912,514 shares : 15.9
Market capitalization (ipo price 0.30) : 124.5 million
Gross profit margin for FY07 : 28.4
Dividend policy not less than 20% of net profit

1H2008 profit is 25% increase compare to 1H2007, assume EPS growth at 25%, forecast EPS is 0.024. The forecast PE is 12.7.

China Eratat Sports Fashion is a new comer that would join the growing list of china sport company listed on SGX. The current listed peers are China Hongxing and China Sports.

By its own right, the company has a reputable brand and is in a fast growing industry. However, if we look at the track record, the company has achieved significant growth on FY2007 only. It is unclear to me that how the future growth rate would be.

It is also fair for us to compare the company against China Hongxing and China Sports since they all operate in the same market segment. I should focus the discussion on 3 aspects – PE, margin and market cap.

China Hongxing: price 0.61, eps 0.035, PE 17.4x, gross margin 41.1%, market cap 1.8billion
China Sports: price 0.91, eps 0.106, PE 8.6x, gross margin 22%, market cap 306mil

Hongxing is in its own league in terms of PE, margin and market cap. ERATAT is much a smaller player compare to both, or maybe more appropriate to compare against China Sports. Even looking at forecast number, ERATAT 12.7 vs China Sport 8.6, I am hesitate to subscribe.

In the industry discussion, the prospectus cited that

Sportswear in China encompasses apparel, shoes and accessories. China’s sportswear market in 2006 is estimated to be worth between US$4.13 billion to US$5.69 billion. We estimate the Chinese sportswear market to grow by 18.6% to 23.6% between 2007 and 2010. The market size by 2010 is expected to be worth between US$8.16 billion to US$13.26 billion.

Nike, Adidas and Li-Ning are the top three players in the Chinese sportswear market. They collectively occupy between 28.0% and 37.0% of China’s fragmented sportswear market. The remainder comprises approximately 200 smaller players. These players produce sportswear as original equipment manufacturers and original brand manufacturers. There are more than 600 different brands of sportswear in the Chinese market.

This shows that the competition is very intense. I think only the strong brand would survive and thrill.

In the competition discussion, it was highlight that there are two market segments

1.Global brand market segment which brands like Nike, Adidas occupied and targeting top tier cities
2.PRC leading brand market segment which have Li-Ning, Anta, Kangwei, Hongxing Erke and XTEP which mainly targeting second to third tier city

It is interesting to evaluate the competition position and brand equity of each China sports brand and try to identify who is the rising star. Once I have time, I might do some research on this.