Mecox Lane IPO: Fashionable Growth

Oct.25.10 | About: Mecox Lane (MCOX)

With one busy week left on October's IPO calendar, the US IPO market has already churned out 14 deals, more than any month since December of 2007. China-based growth companies have been a major contributor to the welcome uptick in deal activity and show no signs of slowing, as they represent two of this week's six potential issuers. Facing a sluggish and shaky economic recovery on the domestic front, US IPO investors have eagerly snapped up shares of compelling growth stories such as ChinaCache International ((NASDAQ:CCIH); +71%), Country Style Cooking ((NYSE:CCSC) ; +104%) and TAL Education ((NYSE:XRS); +65%). This week's two featured stocks are both backed by Sequoia, and both offer exposure to secular growth in discretionary incomes in China: fashion e-commerce platform Mecox Lane (NASDAQ:MCOX) and greenhouse vegetable producer Le Gaga Holdings (NASDAQ:GAGA).

Ready for the Runway?

Mecox Lane (MCOX) has grown from a mail-order business into China's leading fast fashion e-commerce platform, targeting a large demographic of young urban female shoppers with rising discretionary incomes. The company's website,, offers proprietary and third party branded apparel, accessories, home furnishings, and beauty and healthcare products at prices as far as 50%-70% below those at department stores. Mecox Lane also sells its branded women's apparel via 478 mostly franchised stores in 182 second- and third-tier cities. By investing in logistics and IT infrastructure to support the rapid addition of third party brands and its planned expansion into new product categories, Mecox Lane looks to build on its first mover advantage in China's emerging e-commerce market. Mecox Lane has grown revenues at a 70% CAGR since 2007 (to $209 million in the 12 months ended June 2010) and its efficient online model supports positive free cash flows ($8.5 million in 2009). That said, low industry barriers to entry will likely invite competition from established e-commerce players such as China's Alibaba and global leader (NASDAQ:AMZN). Shanghai-based Mecox Lane plans to raise $106 million and is expected to begin trading on the NASDAQ on Tuesday. Credit Suisse (NYSE:CS) and UBS Investment Bank (NYSE:UBS) are the lead underwriters on the deal.

Bad Romance?

Le Gaga Holdings originally began as a small broccoli farm operated by the founder and CEO of the company and now cultivates over 1,000 varieties of vegetables on 16 farms located in southern China. The vegetable producer has amassed a customer base of over 200 wholesalers, institutions and supermarket chains and plans to increase focus on its higher-margin greenhouse segment, which allows for temperature regulation and off-peak production. Coupled with an annual planning system based on horticultural research and development and market analysis, this strategy has allowed Le Gaga to successfully grow its top line and improve production yield over the past few years. However, it remains a relatively small company with only $41 million in sales for the most recent fiscal year, and its short track record adds risk to an already volatile business. Le Gaga plans to raise $92 million and is expected to begin trading on the NASDAQ on Friday. BofA Merrill Lynch (NYSE:BAC) and UBS Investment Bank are the lead underwriters on the deal.

More China Deals in the Lineup

Though interest in the majority of recent Chinese ADRs has been strong over the past month, lackluster performance exhibited by companies such as Ming Yang Wind Power Group (NYSE:MY) and ShangPharma Corporation (NYSE:SHP) indicate investors are still choosing carefully from the ever-increasing array of China-based IPOs. Along with Mecox Lane and Le Gaga, the two Chinese ADRs scheduled on the IPO calendar for next week (Xueda Education Group (NYSE:XUE) and SinoTech Energy (NASDAQ:CTE) will add to the growing list of China-based companies looking to take advantage of growth-hungry investors in the US.