L’Occitane IPO: L’Occitane International's Chinese makeover doesn’t quite convince. A $700 million listing in Hong Kong sounds apt for the cosmetics maker, which now has more shops in Greater China than France. But the proposed China-style valuation looks a bit rich. L’Occitane’s Chinese stores may be slow to generate returns, and its plans for an emerging-market growth spurt look risky.
Being the first French company to list in Hong Kong is a savvy marketing move. L'Occitane has already got an effective stamp of Chinese approval by securing China's sovereign fund, China Investment Corp, as a cornerstone investor. The publicity around this alone may help L'Occitane sell not just its shares, but a few more jars of its fancy-flavoured body lotions and hand creams.
Yet L’Occitane is not yet a pure China play. At the midpoint of its initial public offering range, it hopes to sell shares at 20 times its projected 2010 earnings. That would rank it alongside Chinese cosmetics retailer Sasa, according to UBS — implying no traditional IPO discount. A better comparison might be make-up company Avon, at 16 times 2010 earnings. Esprit, a Western clothing retailer with big operations in Greater China, trades at 15 times.
Moreover, L’Occitane's existing Chinese stores do not yet seem to be pulling their weight. It has 46, more than in the UK and almost as many as France. Yet the group refuses to disclose how much revenue China brings in. Sales per new store in the “other countries” group, which includes the mainland, are a third of those in Hong Kong. That makes it hard to see how effective L’Occitane’s China strategy has been so far.
Fast expansion also has its own risks. L’Occitane plans to open up to 650 new stores in the next three to five years, versus 59 stores in 2010. It may roughly double in size in China. Not only might that depress margins while new stores get going, but ubiquity may dilute the “affordable luxury” brand among status-conscious Eastern consumers. China may be L’Occitane’s biggest selling point, but it is too soon to hand it a “China premium”.