ARC Capital Holdings invests in China’s fast-growing department store sector

Under the terms of the transaction, ARCH has agreed to acquire 18 million shares of a provincial department store chain, representing 12.5% of its total issued and outstanding share capital, for RMB 135 million (USD 17.8 million). The proposed  transaction is subject to local regulatory approval. 

ARCH and its investment manager, ARC Capital Partners Limited, believe there is substantial potential for growth in China’s department store market. The top ten players are estimated to represent only 8-10% of the entire market at present, but this is expected to grow at a 14% CAGR over 2006 – 2010 based on the following factors: 

• Low penetration compared to more developed countries;
• Increasing income earning power and the rise of a middle-upper class; and
• Shift from traditional retail formats to department stores and from purchasing basic
• necessities to more discretionary products.
• The target companyshas seven department stores generating more than RMB 1.5 billion (USD 197 million) in revenue and RMB 93 million (USD 12 million) in net profit for 2006. All stores are located in prime city locations with three self owned properties and the rest with long term leases.

Close consideration will be given to a possible public listing of the Target which should be  highly attractive to both institutional and retail investors based on the successful listings of  similar companies including Golden Eagle, Parkson, Intime and Jiahua Department Stores. 

ARCH also believes its entry valuation of 13 times forward P/E offers considerable upside  when compared to average valuations of 51.8 times for comparable Chinese department stores and 22.9 times for comparable Korean and Japanese department stores.