Beijing Sanfo Outdoor Products, which claims to be China's largest specialty retail group in the outdoor sector, had a good start at the Shenzhen Stock Exchange on Dec. 9. The retailer ended up raising about 160 million yuan renminbi (€22.6m-$24.7m) from its long-awaited initial public offering, issuing 17 million new shares that now represent about 25 percent of the equity.
The value of the stock subsequently enjoyed a surge. The new Sanfo stock was offered on the first day of trading for RMB 9.42. Reportedly, the share was oversubscribed 674 times a few days before its introduction. The share price has been rising steadily, reaching RMB 35.19 as of today and giving the company a stock market capitalization of RMB 2.14 billion (€302.4m-$330.9m).
Heng Zhang, the 45-year-old founder and chief executive of the company, which is regarded as the Chinese version of REI, concentrating on the sale of major international outdoor brands, remains the largest shareholder in Sanfo, although his stake has declined from 38 percent before the IPO to 28 percent.
He told us that the new financial resources will be partly used to acquire Chinese wholesale distributors of foreign outdoor brands. The wholesale business represents only a small part of the company's total revenues, representing Nikwax, Lizard and Julbo. Still, the new funds will mainly be needed to push the expansion of Sanfo's network of shops across the country, notably into second and third-tier cities, as the chain is aiming for a widespread presence around the country. Sanfo is planning to open about 37 new stores in 26 cities within the next three years.
The company only opened a couple of small stores this year. By the end of 2014, the chain counted 36 points of sale in 12 cities with a focus on Beijing, where Sanfo is based. In 2014, the company opened four new outlets, two in Beijing and one each in Suzhou and Wuxi. Two stores were closed, in Changchun and Chengdu. Online sales reached a level of 15 percent of the total turnover. In previous years, this share was in the high single digits. The funds collected through IPO should also be used for investments in information technology, and the share of e-commerce is expected to grow to about 25 percent of the turnover in the medium term.
Zhang has been working on the IPO project for at least six years. In the meantime, he went through two rounds of venture capital financing, in 2008 and 2010, ending up with a total of 13 individual shareholders. In the years 2013 and 2014 his plans were set back as the Chinese government put all IPO applications on hold to cool down the economy. China's regulatory authorities had agreed in principle to get Sanfo's IPO in motion last July, after approving a detailed company prospectus, but the listing was delayed because of turmoil in the country's stock markets.
Sanfo's sales and profits have gone up this year, Zhang said. According to the latest published figures, the company booked sales of RMB 360 million (€50.8m-$55.6m) in 2014, up from RMB 300 million in the prior year. The gross margin was around 38-39 percent last year, and Zhang had some other issues with the profitability. Net profits slipped by 10 percent in 2014, ending up with a net margin of 8 percent of sales, mainly due to rising expenses for locations and personnel.
Zhang has been cutting down expenses over the past years, notably by shutting down stores in the costly shopping malls of some big cities. About one-third of the stores were not profitable in 2014. Another issue weighing down on Sanfo's earnings has been a large inventory of products in its warehouses, notably apparel.