Hong Kong Upcoming IPO - China Dongxiang

Sept. 20 (Bloomberg) -- China Dongxiang (Group) Co., owner of Chinese rights to the Kappa sportswear brand, will raise as much as HK$5.47 billion ($703 million) in a Hong Kong initial public offering.

The Beijing-based company and its shareholders plan to sell a combined 1.38 billion shares, equivalent to a 25 percent stake, at between HK$3.60 and HK$3.98 a share, according to an e-mail sent to investors today.

Chinese companies have raised $17.6 billion in Hong Kong IPOs this year, according to data compiled by Bloomberg, as investors bet on increasing demand in the world's fastest-growing major economy. Five-year-old Dongxiang owns rights to the Italian sportswear brand, best known for sponsoring soccer clubs including Juventus, in China and Macau.

``I really like the industry and don't think much can go wrong up to the Olympics and with a booming economy,'' said Sebastiaan de Bont, who manages emerging markets equities at Fideuram Asset Management in Dublin. Owning an international brand in China is ``quite unique'' and ``obviously an advantage.''

China's sportswear industry is growing at a 23 percent annual rate and will reach 46 billion yuan ($6 billion) in 2008, boosted by increasing household income and the 2008 Beijing Olympics, Daiwa Institute of Research said in a June report. It cited Zou Marketing, a sports-branding consultancy based in Shanghai.

Valuation

The sale values Dongxiang at HK$21.8 billion, based on the high end of the price range, or 34 times its estimated 2007 earnings, according to two people involved in the transaction.

Chen Yihong, Dongxiang's 49-year-old chairman, didn't answer calls to his Hong Kong office today. The company is the first Chinese sportswear firm to acquire a major international brand.

New shares sold by Dongxiang account for 86 percent of the stock offered. The rest is being sold by Morgan Stanley's private equity arm, which bought a 20 percent stake in Dongxiang last year, the people said.

Anta Sports Products Ltd., China's largest maker of athletic shoes, has gained more than 60 percent since its stock started trading on the Hong Kong stock exchange July 10. Li Ning Co., the Chinese sportswear brand endorsed by basketball star Shaquille O'Neal, is trading at close to 64 times this year's estimated earnings, according to Bloomberg data. Li Ning sold its 80 percent stake in Dongxiang to Chen's family in June 2005.

Corporate Investors

The family of Chen, a former executive director at Li Ning, owns about 74 percent of Dongxiang before the IPO. Dongxiang also set aside about $70 million worth of shares for three corporate investors, including China Life Insurance Co., hedge fund Tiger Global Management LLC and Intime Department Store Group Co., the people said.

Deutsche Bank AG and Merrill Lynch & Co. are arranging the sale. Mark Bennewith, a Singapore-based Deutsche Bank spokesman, and Rob Stewart, a Merrill Lynch spokesman in Hong Kong, declined to comment.

Dongxiang doesn't own any factories. Like Nike Inc. and Adidas AG, it farms out production and sells products through more than 1,400 stores throughout the country operated by distributors.

BasicNet SpA, the Italian sportswear firm that makes and sells Kappa and Robe di Kappa branded goods, recorded a one-time gain of 27.1 million euros ($37.9 million) last year from the sale of rights to those brands in China and Macau, according to its statement on Sept. 12.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net .