Friday, May 11, 2007
Belle (1880) & the 3-star Chef who'd make Cooking Mama Proud
Warning: This post is based on a causal and incomplete read of the prospectus without any elaborate work done on the company nor its industry, which I think won't be necessary anyway.
Belle the dragon head retail play is creating sensation in the market. It's gonna become the biggest among all China retail and consumer product plays, surpassing even Mengniu and Li Ning. It's so profitable and the business is so good that Chairman Tang has claimed that every new store can be profit making one month after opening, even there's over 3,800 stores already. Other retailers have much to learn from Belle.
Track record was nothing short of breathtaking. Revenue for the last 3 years was $870m, $1,732m, $6,239m, and profits were $75m, $235m, $977m. I don't know about you but I couldn't stop but wondered what happened in 2006 that magically transpired Belle into a mighty dragon. It turned out the credit should go to the 3-star chef Chairman Tang and the professional cooking crew from Morgan Stanley.
Let's take a look at the main ingredients and steps:
(1) Belle started out as a small shoe maker in SZ in 1991 with its own brands and retail shops in HK. In China, it engaged a group of distributors, who were mostly Chef Tang's relatives and friends, to sell its shoes. Shops in China grew to over 600 in 2002. There's no mentioning of the profitability of either Belle nor the distributors during this time.
(2) When China opened up the retail market to foreigners in 2004, Belle wanted to a piece of it and by some unknown mechanism ousted all distributors and took up all their existing shops and personnel in 2005, at no compensation. Or more specifically, an unknown HK individual showed up and bought out all the distributors, then handed everything over to Belle. That's all there is about this episode in the prospectus.
(3) Profits of Belle were respectable up to that point, earning $75m as a pure manufacturer in 2004, and tripling that amount to $235m after assuming the retail operation from sept 2005. Annualized earning from the retail side in 2005 may be $480m. Again, how Belle managed to take back this much earning from the distributors without paying is unknown.
(4) Then came the Morgan Stanley cooking team. Between sept 2005 and june 2006, MS private equity fund and another fund bought Belle shares in three occasions for a total of $544m. And you should probably know the average cost per share is only $1.50, 76% discount to the top IPO price of $6.20. But the curious thing is that only $24m was for new shares while $520m was for old shares bought mostly from Chef Tang. Maybe he really needed the money to take care of things.
(5) Chef Tang wasn't taking all money away, yet. Also in sept 2005, he and a group of others (funny enough some ex-distributors' names showed up here) subscribed for new Belle shares for $448m. With this money, Belle started its massive expansion and doubled its size to over 3,800 stores in a little more than one year (including acquiring sportswear stores below).
(6) Chef Tang had another secret ingredient, sportswear retail, which was part of the original distributors' business but wasn't taken up by Belle as it had wanted to focus on shoe retail only. This was back in the end of 2005 and Chef Tang took over the sportswear retail (maybe some 500 shops and staff), in similar unexplained fashion, from the distributors at no cost. Only a few months later, Belle decided it was now time to expand beyond shoe retail, and it acquired Chef Tang's sportswear retail operation. The purchase was done in june 2006 via issue of new Belle shares and the price was $831m!
By now, if you are a normal person like me, you should feel dizzy enough about all these oddball transactions which had nothing to do with shoes nor sportswear. So I did some simple math for everyone.
(1) Belle received $472m from Chef Tang and the funds and paid out $588m in dividends.
(2) Chef Tang and others put in $448m, got back $520m from selling shares to the funds, $416m in dividends, and $492m from selling shares in IPO, netting $980m profit. And Chef Tang and others still hold $30.5b worth of shares after IPO.
(3) The funds put in $544m, got back $68m in dividends and $964m from selling shares in IPO, netting $488m profit. And they still hold $4.1b worth of shares after IPO.
(4) You and I will need to put in $6.2 a share + 1.25% brokerage + 6% margin interest. We'll probably get back less than 5% allotment and make a profit when our shares rise for more than 10%.
There you have it, the recipe to grow a shoe maker from $300m to over $50b, 166x in 2 & 1/2 years!
Finally, a dummy profit forecast. Belle earned $1b last year on $2.6b of net assets. Now with $7b raised from the IPO, earnings should skyrocket to more than $3b for a full year! And market capitalization may even reach $100b 2008!
DISCLOSURE: I wish I had 1880 at $1.5 but I don't hold any at time of writing.
Belle the dragon head retail play is creating sensation in the market. It's gonna become the biggest among all China retail and consumer product plays, surpassing even Mengniu and Li Ning. It's so profitable and the business is so good that Chairman Tang has claimed that every new store can be profit making one month after opening, even there's over 3,800 stores already. Other retailers have much to learn from Belle.
Track record was nothing short of breathtaking. Revenue for the last 3 years was $870m, $1,732m, $6,239m, and profits were $75m, $235m, $977m. I don't know about you but I couldn't stop but wondered what happened in 2006 that magically transpired Belle into a mighty dragon. It turned out the credit should go to the 3-star chef Chairman Tang and the professional cooking crew from Morgan Stanley.
Let's take a look at the main ingredients and steps:
(1) Belle started out as a small shoe maker in SZ in 1991 with its own brands and retail shops in HK. In China, it engaged a group of distributors, who were mostly Chef Tang's relatives and friends, to sell its shoes. Shops in China grew to over 600 in 2002. There's no mentioning of the profitability of either Belle nor the distributors during this time.
(2) When China opened up the retail market to foreigners in 2004, Belle wanted to a piece of it and by some unknown mechanism ousted all distributors and took up all their existing shops and personnel in 2005, at no compensation. Or more specifically, an unknown HK individual showed up and bought out all the distributors, then handed everything over to Belle. That's all there is about this episode in the prospectus.
(3) Profits of Belle were respectable up to that point, earning $75m as a pure manufacturer in 2004, and tripling that amount to $235m after assuming the retail operation from sept 2005. Annualized earning from the retail side in 2005 may be $480m. Again, how Belle managed to take back this much earning from the distributors without paying is unknown.
(4) Then came the Morgan Stanley cooking team. Between sept 2005 and june 2006, MS private equity fund and another fund bought Belle shares in three occasions for a total of $544m. And you should probably know the average cost per share is only $1.50, 76% discount to the top IPO price of $6.20. But the curious thing is that only $24m was for new shares while $520m was for old shares bought mostly from Chef Tang. Maybe he really needed the money to take care of things.
(5) Chef Tang wasn't taking all money away, yet. Also in sept 2005, he and a group of others (funny enough some ex-distributors' names showed up here) subscribed for new Belle shares for $448m. With this money, Belle started its massive expansion and doubled its size to over 3,800 stores in a little more than one year (including acquiring sportswear stores below).
(6) Chef Tang had another secret ingredient, sportswear retail, which was part of the original distributors' business but wasn't taken up by Belle as it had wanted to focus on shoe retail only. This was back in the end of 2005 and Chef Tang took over the sportswear retail (maybe some 500 shops and staff), in similar unexplained fashion, from the distributors at no cost. Only a few months later, Belle decided it was now time to expand beyond shoe retail, and it acquired Chef Tang's sportswear retail operation. The purchase was done in june 2006 via issue of new Belle shares and the price was $831m!
By now, if you are a normal person like me, you should feel dizzy enough about all these oddball transactions which had nothing to do with shoes nor sportswear. So I did some simple math for everyone.
(1) Belle received $472m from Chef Tang and the funds and paid out $588m in dividends.
(2) Chef Tang and others put in $448m, got back $520m from selling shares to the funds, $416m in dividends, and $492m from selling shares in IPO, netting $980m profit. And Chef Tang and others still hold $30.5b worth of shares after IPO.
(3) The funds put in $544m, got back $68m in dividends and $964m from selling shares in IPO, netting $488m profit. And they still hold $4.1b worth of shares after IPO.
(4) You and I will need to put in $6.2 a share + 1.25% brokerage + 6% margin interest. We'll probably get back less than 5% allotment and make a profit when our shares rise for more than 10%.
There you have it, the recipe to grow a shoe maker from $300m to over $50b, 166x in 2 & 1/2 years!
Finally, a dummy profit forecast. Belle earned $1b last year on $2.6b of net assets. Now with $7b raised from the IPO, earnings should skyrocket to more than $3b for a full year! And market capitalization may even reach $100b 2008!
DISCLOSURE: I wish I had 1880 at $1.5 but I don't hold any at time of writing.
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