AS Wastons' IPO could extend its China business

Store front of Watsons in Yichang, Hubei.[Liu Jiao/chinadaily.com.cn]

Hong Kong tycoon Li Ka-shing is expected to use proceeds from what could be the world's biggest retail sector IPO to expand his health and beauty business in China - a market forecast to grow by around 40 percent to $186 billion by 2015.

In the process, Li would aim that firepower against rivals such as Mannings, controlled by Jardine Matheson Group's Dairy Farm International Holdings Ltd; Alliance Boots, 45 percent-owned by Walgreen Co, the biggest US drugstore chain; and Vivo, part of China Resources Enterprise Ltd.

Billionaire Li's conglomerate Hutchison Whampoa Ltd last week scrapped the sale of ParknShop, its Hong Kong supermarket chain, and said it would carry out a strategic review of AS Watson Co Ltd, its retail arm, which includes ParknShop, the Watsons, Superdrug and Kruidvat personal care stores, Fortress electronic appliance outlets, and chains selling food and wine and luxury and cosmetic products.

That review may include an initial public offering of all or parts of the business, it said, without elaborating. .

Applying a 14 times multiple to last year's earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.64 billion, an IPO could value AS Watson at about $23 billion, bankers and analysts estimate. If 25 percent of AS Watson is floated - a standard Hong Kong IPO percentage - the IPO could raise close to $6 billion.

Health, beauty and luxury retailing accounted for 82 percent of 2012 revenue at AS Watson, which has its roots in a small dispensary set up in 1828 to provide free medical services to the poor in the southern province of Guangdong.

"China's health and beauty retail industry is hugely fragmented, and Watson has more room to grow," said John Chan, an analyst at Standard Chartered. "The biggest hurdle to growth would be finding the right store location."