UPDATE 4-China hypermarket operator Sun Art surges 41 pct on debut

Wed Jul 27, 2011 5:53am EDT

* Shares jump to as much as HK$10.58 vs IPO price HK$7.20, in flat market

* Best debut among $500 mln-plus Hong Kong IPOs in 2011

* Mainland's hypermarket size to double to 911 bln yuan by 2015- Euromonitor (Updates to stock close, ranks first-day pop)

By Denny Thomas and Donny Kwok

HONG KONG, July 27 (Reuters) - China's top hypermarket operator Sun Art Retail Group Ltd surged 41 percent on its debut on Wednesday, the best first-day pop for a major Hong Kong IPO this year as investors bet on a sector expected to double in size by 2015.

The strong debut for Sun Art, which raised $1.1 billion, could lift some of the gloom over the Hong Kong IPO market. After the summer lull, an estimated $12.4 billion worth of IPOs are expected to be launched in Hong Kong by 18 companies, said IFR, a Thomson Reuters publication.

It contrasts sharply with other big deals, including Samsonite International SA , which slumped 7.7 percent, and a flat debut from Italian fashion house Prada SpA .

"The stock is overpriced but you have no choice but to pay a high premium if you buy a pure China growth story," said Alex Wong, a director at Ample Finance Group.

"The stock can jump further as investors are seen excited by its growth story."

Sun Art's 41 percent jump makes it the biggest first day move this year for a Hong Kong initial public offering of more than $500 million. Three much smaller IPOs rose more.

Sun Art -- a joint venture between Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan SA -- sold shares at the top of the marketing range in early July.

The stock ended at HK$10.14 versus the IPO price of HK$7.20, while the benchmark Hong Kong share index eased 0.1 percent. The stock had risen as much as 47 percent, touching a high of HK$10.58.

WILLING TO PAY PREMIUM

The company is China's top hypermarket operator by sales, with a 12 percent market share, ahead of Wal-Mart Stores with 11.2 percent, China Resources Enterprise at 9.8 percent and Carrefour with 8.1 percent, the company's IPO prospectus said.

"Sun Art is very well positioned. It is the leader in the future biggest retail market worldwide," said Oscar Chung, a fund manager at Capital Securities Investment Trust in Taipei.

"For Sun Art's leading edge, investors would be willing to pay a higher P/E to its shares, at 35-40 times compared with the 30 times average for the retail sector," said Chung, whose fund had $462 million under management and owned shares of Ruentex .

At the IPO price, Sun Art was valued at 31.5 times expected 2011 earnings and 24.1 times 2012 earnings, based on the consensus estimate of banks underwriting the deal. Rival China Resources Enterprise trades at a P/E of 32.4 times for 2011 and 26.4 times for 2012.

Sun Art had delayed its debut by nearly two weeks due to a discrepancy in the IPO prospectus relating to historical earnings per share figures.

HYPERMARKET BOOM

Investor appetite for Sun Art was whetted by the prospects for China's hypermarket segment, the fastest growing in the mainland's grocery retail industry. Hypermarkets have grabbed about 14 percent of the grocery retail market from just 1 percent in 2000, Euromonitor estimates.

The hypermarket sector is forecast to grow at a compounded annual rate of 10.1 percent between 2010 and 2015, Euromonitor says, with the total market size projected to double to 911 billion yuan ($141 billion) by 2015.

Hypermarkets are chained or independent retail outlets with a selling space of over 2,500 sq.m and with a primary focus on selling food, beverages, tobacco and other groceries as well as a range of non-grocery merchandise.

Despite the strong growth, China has just 2.4 hypermarket stores per million people, compared with 25 in France, 12.3 in the United States and 7.6 in South Korea, the IPO prospectus said.

Sun Art has 197 hypermarkets across 21 of China's 33 provinces and is building 51 more stores in the mainland and has secured 121 locations for future openings.

Around half of the IPO proceeds will be used to open new stores, while 30 percent will be set aside to pay down debt.

The rest of the funds will be used to upgrade and remodel existing hypermarkets and set up new distribution centres.

The deal was only the second $1 billion-plus Hong Kong IPO this year to price at the top of price range, after casino operator MGM China Holdings Ltd in May.

UBS AG , Citigroup Inc and HSBC Holdings Plc were joint global co-ordinators for the deal.

BNP Paribas SA , China International Capital Corp, Goldman Sachs Group Inc and Morgan Stanley helped underwrite the offering as joint bookrunners.

Sun Art also sold $420 million in shares to cornerstone investors, including sovereign wealth fund Government of Singapore Investment Corp and Malaysian state investor Khazanah . (Additional reporting by Faith Hung in Taipei, Rachel Lee in Hong Kong; Editing by Ken Wills and Vinu Pilakkott)

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