24 August 2019
Chinese sportswear retailer Pou Sheng's business performance has not been too bad, but its share price still took considerable beating. Photo: Pou Sheng
Chinese sportswear retailer Pou Sheng's business performance has not been too bad, but its share price still took considerable beating. Photo: Pou Sheng

Investors may have been unduly bearish on traditional retailers

“The shoe that fits one person pinches another” is a famous quote attributed to Swiss psychiatrist Carl Jung. We’re reminded of this saying as we look at retail sector players on the stock market and a privatization proposal for Chinese sportswear retailer Pou Sheng International (03813.HK). 

Pou Sheng announced in a stock-exchange filing Sunday that it has received a proposal from Pou Chen Corp to be taken private.

Pou Chen offered a cancellation price of HK$2.03 per share, which represents a premium of nearly 32 percent over Pou Sheng’s last closing price.

Following the announcement, Pou Sheng’s share price surged 29 percent to HK$1.99 on Monday, which put its market value at HK$8.2 billion. That represents a P/E multiple of 12.9 and P/B ratio of 1.2. That’s still fairly low valuation level compared to China’s leading retailers.

For instance, Chinese shopping mall group Golden Eagle (03308.HK) now has a market cap of HK$15.5 billion, which is equivalent to a P/E ratio of 34 and P/B ratio of 2.8.

Among Hong Kong firms, cosmetics retailer Sa Sa International (00178.HK) has a current market value of HK$10 billion. The P/E and P/B ratios stand at 30 and 4.5 respectively. 

Pou Sheng’s earnings figures are not bad. Its sales revenue rose 12 percent to 16.2 billion yuan in 2016, and net profit jumped 41 percent to 560 million yuan. In the first half of last year, revenue growth accelerated 14.5 percent to 9.5 billion from the year before. Interim profit, however, fell 19.6 percent as the company invested heavily in its online business.

The company was operating 8,500 sportswear shops in mainland China as of June last year, with 30,000 employees.

Pou Sheng was listed in Hong Kong in 2008, and raised HK$2.5 billion at HK$3.05 per share back then. The current privatization offer represents around 40 percent reduction in value compared to the initial public offering price nearly a decade ago.

But the proposed offer tells us one thing: as investors have been shunning traditional retailers in light of intensifying completion from online rivals, industry professionals see value after the stock price slump.

In a similar case to Pou Sheng, Sheng Baijiao, CEO of Belle International, together with private-equity funds offered a 19.5 percent premium to take his company private last year. The deal valued Belle at HK$53.1 billion, around one third of its peak level in 2013.

The industry veterans have reasons to be positive.

Supermarket and shopping mall counters went through a hard time a couple of years ago and their prices plunged under the threat from online rivals. The sector then staged a comeback of sorts with the so-called new retail concept.

In the new retail model, internet giants want to integrate offline channels with their online platforms. Leading e-commerce firms have acquired or bought stakes in supermarkets and shopping malls, leading to a recovery in valuations of traditional retail plays.

The same could happen to the shoe retailing sector.

This article appeared in the Hong Kong Economic Journal on Jan 23

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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