Though not in a ringside seat, I nonetheless had a privileged, up-close view of last week’s IPO for Foshan Saturday Shoes. That’s thanks to my friendship with Cao Yuhui, a partner at King & Wood law firm, and Foshan Saturday’s main corporate lawyer for the last several years. It was a successful IPO by a very successful, well-run company. Foshan Saturday, a maker of high-end women’s shoes, raised over Rmb900mn in the IPO, selling about 20% of its equity. The share price closed up almost 20% on the first day of trading. The market cap is now closing in on Rmb5 billion.
For Yuhui, it’s a great personal success. He first started advising the company when they were well along in their planning for what would have been a very ill-advised IPO in Singapore in 2006. Instead, Yuhui worked with the company to close a round of PE finance in 2007. Legend Capital, the venture capital arm of China’s largest computer manufacturer, invested Rmb 40 million in 2007. Over the following two years, sales and profits at Foshan Saturday more than doubled. It’s now the fourth-largest women’s shoe company in China, with a widely-known brand, and sales this year of over Rmb 1 billion.
Legend is expected to liquidate its ownership in Foshan Saturday, and should earn a return of five times on its original investment – which is another way of saying that Foshan Saturday’s enterprise value increased five-fold during the time Legend was involved. So, while the VC firm did well, Foshan Saturday’s owner did even better. He is now sitting on a personal stake in the company worth over $350 million. He started the company just seven years ago.
Foshan is a relatively small city by Chinese standards, with a population of about 5.5 million. It’s about two hours drive up the Guangdong coast from Shenzhen. It’s residents are known both for business acumen and personal modesty.
Foshan Saturday is a textbook case of everything going right for a Chinese SME. The company was among the first to see the great potential for developing native Chinese fashion brands. They never bothered with OEM export manufacturing, but focused from the start on building a brand for young, Chinese urban females.
Even more crucial to its success, the company backed away from plans for that early IPO in 2006. The company then was a third of its current size. Many Chinese companies who chose to list in Singapore have since lived to regret it. The market has had few stellar performers among the Chinese SME listed there. Most have stumbled along with low earnings multiples, and as a result, quite a few have tried to delist in Singapore and try to float their shares on China’s domestic market.
Foshan Saturday took the far better course of raising pre-IPO capital, from one of the better firms active in China. They raised only Rmb 40 million, but put it to use efficiently enough to accelerate growth by over 200%. In other words, as in all good investment opportunities among China’s SME, there was a very good place to put a reasonably small amount of capital to work, and earn significant returns.
A lot of that growth came from an efficient strategy of opening retail counters inside shopping malls, where in lieu of rent, Foshan Saturday pays a share of revenue to the landlord. This limits the amount of capital needed to open new outlets. Foshan Saturday now has 1,200. About half the money raised in the IPO will go to opening still more retail outlets.
A recent blog post by the Forbes bureau chief in China took a little swipe at me, saying Fuhrman “claims it is not too hard to pick winners that will quadruple your money in just a few years.” The Forbes writer (who I’ve never met) seems to think I’m daft. Yet, as the example of Foshan Saturday shows, it’s not all that hard to that well, or better.
From what I could gather, Legend Capital didn’t play a highly active role in the company. They knew a solid strategy when they saw one. So, they let the Foshan Saturday team execute, and then sat back and let the money start to roll in. Result: profit to the VC firm of about $30 million on an investment of under $6 million.
My friend Yuhui threw a big party at one of Shenzhen’s swankiest nightclubs to celebrate the IPO’s success. I wasn’t able to go, since I was traveling in Zhejiang. He told me later that there were about 60 guests, mainly mid and senior management from Foshan Saturday. They ran up a bar tab of around $1,500.
I’m not big on drinking, but would have been happy to celebrate with them. Not just Foshan Saturday and Cao Yuhui did well from the IPO. It’s going to make it easier for other strong Chinese SME to achieve a similar success in years to come.
The roadmap is clear. It’s a three-step path to success for a successful IPO by a Chinese SME : (1) resist the lure of an early IPO; (2) bring in a good PE or VC investor to put more capital to work in ways that will earn a high return; and (3) stage an IPO several years later when the business has at least doubled its size.