Mainland electronics conglomerate Realord Group Holdings has made a voluntary conditional cash offer to buy out Hong Kong’s Sincere Group in a deal that values the city’s oldest Chinese-owned department store group at HK$500 million ($65 million), according to a joint stock exchange filing by the two companies.
Realord Group, which is chaired by salesman-turned-smartphone maker Bryan Lin Xiaohui, is offering HK$0.3806 per share to acquire all of the issued shares of the 101 year old company which operates five department stores in Hong Kong.
Should the proposed offer succeed, Sincere will move to mainland ownership after the firm, which is controlled by the family of Philip Ma King-huen, saw its net loss expand by around 42 percent last year to HK$130 million.
Making a Foray into Hong Kong’s Prized Retail Sector
Realord’s initial offer represents a premium of 8.74 percent over the closing price of HK$0.35 per share when trading in Sincere shares was halted at 9:00 am on 5 May.
The proposal is also a multiple of more than nine times the retailer’s net asset value of HK$0.037 per share as of 31 August 2019 as measured by the company’s unaudited consolidated net assets of HK$39.2 million at the time.
Should the initial offer succeed, majority shareholder Win Dynamic – which is 70 percent owned by Sincere chairman Phlip Ma with the remaining 30 percent owned by Sincere independent non-executive director Charles Chan – is set to receive net proceeds of HK$252.2 million for its 50.42 percent stake in the department store chain. Under the same terms, companies affiliated with Sincere will receive net proceeds of HK$99.1 million for their 19.82 percent shareholding.
Sincere shares stood at HK$0.36 at 11:30 on 19 May, 10 percent down after they had resumed trading a day earlier.
Pursuing a Loan-to-Own Strategy
Realord has made its takeover bid for the department store operator after the mainland conglomerate extended an HK$80 million lifeline to the struggling company on 3 April, five days before warning investors that it expected to record a loss for the year ended 29 February 2020 of around 10 to 15 percent more than the HK$130 million shortfall it suffered in the preceding 12 months.
“Sincere has been struggling for some time,” said James Hawkey, an independent consultant with over 20 years experience advising retail clients in Greater China. He added that, “Global retail markets have not been kind to department stores for decades as brands and shopping centres have grabbed the attention of most consumers. Department stores have been in rapid decline in mainland China for the last five years”.
Realord said in the joint bourse filing that the possibility of becoming Sincere’s controlling shareholder had arisen during discussions regarding the 18 month unsecured loan, noting that the deal is an opportunity for the conglomerate to further diversify its business by entering Hong Kong’s department store segment.
Founded by Lin in 2005, Realord grew to be a giant in producing LCD monitors and smartphones, and also has a portfolio of residential and commercial properties in Shenzhen.
Hawkey said that Sincere – which also operates a securities and insurance arm – may be attractive to a mainland company like Realord due to its pedigree and prestige, as well as its Hong Kong-listed vehicle, securities trading operation and retail expertise.
“From the announcement it appears that the intention is to keep Sincere stores open, however with 2019 revenues of just HK$310 million and a loss of HK$104 million, in a climate like today’s, it is going to be an uphill battle to return to profitability,” Hawkey noted, adding that it was “disputable whether this Hong Kong expertise will be useful for Realord’s projects in China”.
Surrendering Retail Space as Sales Collapse
Realord is making its bid for Sincere after the company had notched its seventh full-year loss in a row in the 12 month ending 28 February 2019, with its dwindling sales forcing it to downsize its portfolio from seven to five department stores since 2013.
Last year, the company surrendered its 22,000 square foot (2,137 square metre) location at 108-120 Percival Street in Causeway Bay, the world’s most expensive retail strip, despite the landlord having agreed to reduce the rent 23 percent from HK$1.8 million to HK$1.38 million per month, according to a local media report.
The largest of Sincere’s remaining five locations is a 31,000 square foot store spread over four storeys in the King Wah Centre at 628 Nathan Road in Mong Kok. Sincere’s nine-year lease, which costs the company HK$6 million per month at HK$193 per square foot, is due to expire on 14 June 2022, according to Land Registry Records.
Sincere’s other stores are located in, Central, Sham Shui Po, Yau Tong and Tsuen Wan.
Facing a Lean Period
The latest official statistics for Hong Kong revealed that retail sales in the city fell by 42 percent to HK$23 billion in March, compared with the same month last year, as the coronavirus pandemic tops off a series of disruptions which include social unrest during the second half of last year and the US-China trade war.
The crowds of mainland luxury shoppers that helped build Hong Kong’s reputation as a shopping destination and a playground for retailers have given way to empty streets. International luxury brands like Tiffany & Co, as well as retailers pushing luxury watches from Rolex, Omega and Longines already shut down many of their retail locations during March.
“It is debatable whether Hong Kong will ever find the retail sweet spot it was in seven or eight years ago, with huge spending from mainland visitors,” Hawkey said, adding that the city’s “best way out is to innovate, focus on the needs of the Hong Kong market and be confident that tourist activity both international and mainland will come back slowly.”