Once valued at more than HK$150 billion (US$19.28 billion), Chinese footwear retailer Belle International (01880.HK) has seen more than two-thirds of its market value vanish over the past few years.
It’s reported that China private equity firm CDH Investments Fund Management Co. is in talks with Belle on a potential buyout for US$5.7 billion, which is about the firm’s market capitalization before it was suspended on April 18.
The deal would represent a price-earnings multiple of 15.
Belle has been quite successful in building its brand and distribution channels. Nevertheless, the worsening economics of the industry keep biting into its profit margin.
Belle owns six of the top 10 brands in China’s medium to high-end women’s footwear market.
The company’s sales revenue rose 2 percent to 40.79 billion yuan last year from the year before, indicating Belle has maintained its market dominance.
Belle reported a net profit of 2.93 billion yuan last year, slumping more than 40 percent from 5.16 billion yuan in 2014. That’s why Belle’s share price has performed poorly in recent years.
Belle’s operating margin has shrunk significantly to 10.3 percent last year from 18.2 percent in 2011.
In the past, with a massive physical network of more than 20,000 outlets across China, Belle snapped up the lion’s share of the medium to high-end women’s footwear market.
Adopting a vertical integration model where Belle makes its own shoes and sells them directly to customers, Belle was able to reap nice profits.
But when e-shopping took off, shoppers began to look for online bargains, where a pair of shoes often costs only 10-20 percent of those found in offline stores.
Despite the better quality of Belle shoes, it is still forced to offer more discounts to retain customers.
In fact, Belle has actively responded to the threat from online shopping platforms. Belle’s online shop is still considered one of China’s best business-to-consumer shopping sites and the company has been able to chalk up a large sales volume.
That said, online shopping is a low-margin game, and the proliferation of online shopping has also pulled down Belle’s traditional retail margin.
While able to expand its sales volume, Belle could only do so by sacrificing its margin.
Although it’s fair to say Belle’s management has done its job, at the end of the day, a brilliant manager can only do so much to counter the bad economics of an industry.
This article appeared in the Hong Kong Economic Journal on April 21
Translation by Julie Zhu
[Chinese version 中文版]
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