Mainland fashion sportswear manufacturer Xtep International begins offering its shares to the public in Hong Kong from today.

The sportswear maker aims to raise as much as HK$3 billion by offering 550 million shares. An offer price range of HK$4.05 to HK$5.50 per share has been set.

According to the company's prospectus, 24 percent of the IPO proceeds will be set aside for brand acquisitions, while 22 percent will be used for advertisement to boost brand recognition.

Xtep, which currently operates three brands - Xtep, Disney Sport and Koling - has a total market share of 18.9 percent in the fashion sportswear sector on the mainland. Speaking to reporters over a video conference yesterday, Xtep Chairman Ding Shuipo said that demand for fashionable casual sportswear had been rising in the past four years.

According to the company statistics, the market size of the apparel segment on the mainland that blends stylish elements with sportswear functionality had jumped 36 percent from 2003 to 2007.

"With the Olympic Games approaching, we expect the demand for fashionable sportswear to increase further," Ding said.

Xtep currently has only two self-managed retail outlets, while the bulk of their sales were made through third party distributors or retailers.

The group has a total of 4,993 retail outlets on the mainland.

Ding said that distributing through high quality third party retailers helps boost brand recognition by taking advantage of the distributor's sprawling retail networks. In 2007, the company drastically reduced the portion of direct sales to rely mostly on distributors.

The result of the practice had actually reduced average selling price, leading to decline in gross profits margin from 42.9 percent in 2006 to 34.4 percent in 2007. However, the chief financial officer, Terry Ho, said that the company is confident that margins will improve, since there is still room for product price increases.

In 2008, Xtep aims to achieve a 15 percent price increase in line with the broad industry outlook.

The reliance on third party distributors, however, has its inherent risks, according to Phillip Securities Corporate Finance Officer Dick Lee.

"Without their own retail network means that the company runs the risk of being too dependent on the performance and business decisions of third party distributors," Lee said.

The corporate finance officer added since Xtep is not very well known to investors in Hong Kong, the lack of awareness might impact its share subscription and trading debut performance.

For the current year, Xtep plans to bolster the number of Xtep and Disney sports retail outlets without providing a solid number. The company has a profit forecast of not less than 468 million yuan in 2008 and a dividend payout ratio of not less than 30 percent.

Subscription to Xtep International will close on May 27 and is scheduled to commence trading on the Hong Kong stock market by June 3.

(HK Edition 05/21/2008 page3)