Car locks in $130m of cornerstone support

Five cornerstones secured, including shareholder Hertz, as the Chinese car rental company turns the gas on its planned $468 million Hong Kong IPO.

Car Inc has identified five cornerstone investors ahead of its planned $468 million Hong Kong initial public offering.

The base deal of Car, formerly known as China Auto Rental, will consist of 426.3 million shares, all primary, and represent between 18% and 20% of the enlarged share capital. An exercised greenshoe option will tack on an additional 64 million shares.

Following a week of roadshows, the Chinese car rental company set an indicative price range of HK$7.50 to HK$8.50 under the leads of Credit Suisse and Morgan Stanley. CICC is acting as a joint global coordinator. The deal is scheduled to price on September 12.

Five institutions have agreed to come in as cornerstone investors, including US car rental Hertz, which already owns 20% of Car and plans to increase its allocations in China’s largest rental company once it goes public, a banker close to the deal said.

Combined, Hertz and the other four cornerstones — private equity firm Warburg Pincus, US asset management firm Waddell & Reed Financial, hedge fund Falcon Edge Capital, and Hillhouse — will invest $130 million. They are subject to a six-month lockup.

At HK$7.50 to HK$8.50 per share, Car is being marketed at 14.8 to 16.8 times its 2015 earnings, a reasonable discount to its peers. The company's market cap is $2.5 billion.

Where are the comps trading?
Brazilian car rental Localiza Rent-a-Car is the closest comparable, and is trading at 20.5 times its 2014 earnings. Shares are up 28% so far this year to September 5.

Car rental companies in more established markets, such as Hertz and Avis Budget Group, can also be considered comparables, bankers close to the deal told FinanceAsia. Hertz is currently trading at 19.98 times its 2014 earnings, while Avis is trading at 22 times its 2014 earnings. Performance is varied — shares in Avis are up an impressive 62% year-to-date, but Hertz’s are flat so far this year.

Some 70% of proceeds will go towards expanding Car’s fleet. The company plans to purchase between 45,000 and 60,000 vehicles, adding to the 55,000 cars it had as of the end of March, according to its prospectus.

Twenty per cent of the proceeds, meanwhile, will go towards paying down loans, and 10% towards working capital.

Car focuses on the short-term self-drive rental market in China, which remains fragmented and is forecast to grow at a compound annual growth rate (CAGR) of 27% from 2013 to 2018, according to the company’s prospectus. This CAGR is mainly driven by increasing leisure and business travel by individual and institutional customers, as well as rising needs by licensed drivers who do not own cars.

Rocky revenues
Car has not reported a net profit in the past three years, registering net losses of Rmb223.4 million ($36.4 million) in 2013; Rmb132.3 million in 2012; and Rmb151.2 million in 2011. The losses in 2011 and 2012 were primarily due to its high discount policy — a strategy the company implemented to rapidly grow its market sale as China’s car rental industry remained in the infancy stages. Losses in 2013, however, came from rapidly expanding its fleet.

But after increasing its average daily rental rate, improving brand recognition and boosting its customer base, the company appears to be on the upswing. It reported net profit of Rmb218.3 million for the first six months of 2014, a substantial leap from Rmb1.7 million in the same prior-year period.

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