Tea products seller Tenfu (Cayman) Holdings may have strong brand recognition on the mainland, where it is riding the consumption boom story, but analysts say it will have a daunting task selling its HK$1.6 billion initial public offering amid the global stock market rout.
The company, founded in 1993 by Taiwanese chairman Lee Rie-ho, sells tea leaves, tea snacks and tea ware. It has the largest sales network among all branded traditional Chinese tea product companies on the mainland, its listing prospectus says, citing figures from a Euromonitor International report commissioned by Tenfu.
At the end of March, its products were sold exclusively in 1,062 retail outlets in 29 provinces and administrative regions, of which it owns 453 outlets.
The tea retail market is highly fragmented, with more than 5,000 players. Tenfu had a leading - 3.7 per cent - share of the traditional Chinese tea market in terms of retail sales value last year, compared with 3.9 per cent in 2009 and 3.8 per cent in 2008, according to Euromonitor.
The market research firm believes branded products will drive growth in coming years. Unbranded tea leaves made up over 65 per cent of the mainland's tea industry last year.
Euromonitor forecasts average annual growth of branded products to ease to 13.9 per cent between this year and 2013, from 16.5 per cent in the 10-year period to last year, while the average annual growth of unbranded products is forecast to slow to 10.4 per cent from 11.1 per cent over the same periods.
Before Lee, 75, established the Tenfu business on the mainland, he founded in 1975 Ten Ren Tea, which makes and distributes tea products in Taiwan and North America. The company was listed on the Taiwan stock exchange in 1999, and is separate from Tenfu. Lee has over 60 years of experience in the tea industry and was crowned 'Worldwide King of Tea' by the People's Daily in 2000, Tenfu's prospectus says. His reputation was, however, marred by a 1991 Taipei District Court ruling that he had flouted securities rules, when Ten Ren Securities, which he chaired, engaged in money lending and provision of credit lines without regulators' approval in 1990.
He was sentenced to six months' jail and fined NT$150,000 (HK$38,720). Upon Lee's appeal, the High Court suspended the sentence, subject to a two-year probation, citing his initiatives to reach settlement with investors who lost money.
Tenfu is offering to sell 208.62 million new shares at between HK$4.80 and HK$6.80 apiece. It may sell a further 31.29 million shares if demand exceeds the shares offered.
The price range represents 21.5 to 30.4 times of last year's earnings per share, and 16.3 to 23 times of this year's profit. Net profit for 2010 grew 60.5 per cent to 223 million yuan (HK$271 million). In the first quarter of this year, net profit more than doubled to 94.5 million yuan from 42.9 million yuan a year ago. Tenfu has forecast a profit of not less than 291 million yuan this year.
Gross profit margin grew to 60.8 per cent in the first quarter of this year, from 55.3 per cent last year and 43.8 per cent in 2009. Tenfu said that was because more of its sales were made at the outlets it owned, rather than at resellers. Tenfu owned 453 outlets at the end of March, up from 75 at the end of 2009.
It plans to spend HK$727 million to expand the retail outlets it owns and acquire new stores. It aims to increase its number of outlets - both proprietary and third-party - by 150 annually over the next five years.
Conita Hung Lai-ping, head of equity research at Delta Asia Financial Group, said it would be tough for Tenfu to seek a high market valuation amid the current global stock market slump. That's despite the fact that Tenfu has no direct rival listed in Hong Kong, and that mainland consumption is not expected to be affected much by the downturn in the global financial markets.
Louis Tse Ming-kwong, a director of VC Brokerage, said Tenfu's valuation, based on last year's earnings, was too high to excite investors.
'I don't think its products' uniqueness and market share justify the valuation. Mainlanders may splash on designer bags and watches, but the market for connoisseur-level branded tea is quite limited, except as gifts,' Tse said. 'It is not a price setter in its industry and I am sceptical how long mainland consumer plays can sustain their high profit growth.' To increase the chances of success in its shares offering, Tenfu's underwriters have secured a commitment from US-based fund manager General Atlantic to buy 35 per cent of the shares on offer and to not sell them within a year.
CICC Growth Capital Fund, a unit of China International Capital Corporation, a joint bookrunner of the offer, will have upon Tenfu's listing a paper profit of around HK$66 million on its HK$78 million investment in December, assuming the stock is priced at HK$5.80 a share. The fund has agreed not to sell its shares within six months of the listing.
Tenfu declared a dividend of 5 million yuan in 2008 and 307.2 million yuan last year, which amounted to 66 per cent of its total net profit in the last three years.
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