Car prices HK IPO at top of range

Strong retail uptake allowed the Chinese car rental company to raise $468m and price its shares at the top of the indicative range.

Car Inc has priced its shares at the top of the range ahead of its Hong Kong initial public offering.

The issuer, formerly known as China Auto Rental, raised $468 million after selling 426.3 million primary shares at HK$8.50 per unit, according to sources close to the deal. The initial range was between HK$7.50 and HK$8.50 per share.

Car’s story sold extremely well with retail investors, with this tranche oversubscribed by 160 times, sources told FinanceAsia.

The institutional tranche was also multiple times oversubscribed, with some noting that, given the cornerstone support — the issuer secured $130 million after a week of roadshows — there were not enough shares on offer to meet the demand.

There were more than 350 institutional lines in the book with a fairly even geographic split between Asia, Europe and the US.

Demand will warrant exercising the greenshoe option, which will add an additional 64 million shares, or 15%, to the base deal.

Significant cornerstone backing from a number of global institutional investors is part of the reason Car’s story resonated so well.  

Five institutions agreed to come in as cornerstone investors, including US car rental company Hertz, which already owns 20% of Car.

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 — invested $130 million. They are subject to a six-month lockup.

But sources say Car’s underlying potential was the main reason investors were so keen. Car has a 30% market share of what remains a “very underpenetrated market” in China, one banker close to the deal told FinanceAsia, while global peers have much smaller growth potential and trade at higher price-to-earnings ratios.

At HK$8.50 per share, Car is being marketed at 16.3 times its 2015 earnings, a discount to most of its comparables, which include Brazilian car rental firm Localiza Rent-a-Car, Avis Budget Group and Hertz itself.

Localiza, Car’s closest peer, is currently trading at 19.79 times its 2014 earnings, with shares up 20% so far this year up to September 12.

Avis, a much larger global player but still considered a peer, is trading at 21.29 times its 2014 earnings, and has risen 56% up to September 12, while Avis is trading at 19.64 times its 2014 earnings and is down 3%.


Some 70% of the 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 at the end of March.

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

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 largely due to its high discount policy — a strategy the company implemented to rapidly boost its market share as China’s car rental industry remained in the infancy stages. Losses in 2013 meanwhile came from quickly expanding its fleet.

But Car’s future appears bright. China’s short-term self-drive rental market — the sector Car focuses on — is forecast to grow at a compound annual growth rate (CAGR) of 27% from 2013 to 2018, according to the company’s prospectus.

And 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 in the first half of 2014, a notable rise from Rmb1.7 million in the same prior-year period.

Morgan Stanley and Credit Suisse led the deal, with CICC and China Renaissance acting as joint global coordinators.

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