China Auto Rental yesterday morning cancelled its initial public offering on Nasdaq after failing to attract sufficient demand from investors. The company was scheduled to price the deal yesterday following a two-week roadshow and was set to start trading last night, making it only the second Chinese company to list in the US this year.
The IPO was seeking to raise between $115.5 million and $137.5 million.
According to sources, investors were interested in the company, which runs the largest car rental business in China, but not at the price on offer. The gap between what investors wanted to pay and what the company was willing to accept was so big, in fact, that there really wasn’t any discussion about pricing the deal below the initial offering range, or even to lower the range, the sources said.
In a brief statement, China Auto Rental said only that it had decided to postpone its proposed IPO due to the current capital market conditions.
A key issue for the company to overcome was the poor trading performance of Chinese online discount retailer Vipshop Holdings, which has fallen 19.2% since its trading debut on March 23 as investors remain concerned about accounting practices and corporate governance at Chinese companies. At one point Vipshop was down almost 35%, and that was after it had fixed its IPO price 23% below the initial price range.
But China Auto Rental was also faced with the task of having to convince investors that it will be able to deliver on the high growth that it is projecting for the years ahead. The company, which was set up in 2007, has been growing rapidly in terms of fleet size and revenues, but still made a loss of Rmb151.4 million ($24.1 million) last year. It is expecting to make a small profit this year, and during the roadshow it published its first quarterly profit, suggesting it may be on track to achieve that.
However, like other high-growth companies, China Auto Rental’s forecasts depend on a lot of assumptions about the industry that many investors simply aren’t ready to just accept in the current market environment, one source said, noting that investors are still very stock specific and are demanding very wide IPO discounts in general. And that caution is being compounded for Chinese companies in light of last year’s accounting scandals.
Another source added that the current negative market sentiment is also making investors more worried about the liquidity in small-cap issues as they are concerned they may not be able to get out quick enough if the share price was to start tumbling.
So, the question remains which Chinese company will be able to break through the negative sentiment and achieve a successful listing in the US. Aside from the fact that it has still to break-even on a full-year basis, China Auto Rental looked like a promising candidate as it ticked a lot of boxes that US investors used to like about Chinese companies: it operates in a fast-growing industry that US investors are familiar with from their home market; it is the largest player in this industry in China by several metrics, including fleet size, network coverage, number of customers and revenues; it is the first company from the China car rental sector to seek a listing in the US; and it is growing quickly.
One source said what is needed is a company that is easy to understand and that also has a well-established business. Supposedly it also needs to come at a pretty generous valuation to tip the balance of demand in its favour.
China Auto Rental, which is majority-owned by Legend Holdings, a major investment holding company in China and the parent of Hong Kong-listed computer manufacturer Lenovo, was looking to sell 14.9% of its share capital in the form of 11 million American depositary shares (ADS), plus a 15% greenshoe. The shares were offered at a price between $10.50 and $12.50, which valued the company at a 2013 price-to-earnings multiple of 10.1 to 11.1, or at an enterprise value-to-Ebitda multiple of 4.1 to 4.5 times for the same year, based on the joint bookrunner consensus,
The latter was on par with the well-established US rental companies, such as Avis or Hertz, which trade at EV/Ebitda multiples of about 4.2, but at a significant discount to other high-growth comparables like Localiza in Brazil, or Zipcar, a membership-based car sharing company with operations in the US and the UK. The latter two are quoted at a 2013 EV/Ebitda multiples of about seven times, according to a banker.
China Auto Rental has a rental fleet of 25,845 vehicles, which as of the end of 2011 was three times as many as its biggest competitor and as many as the next eight car rental companies combined, according to third-party consulting firm Roland Berger. It is active within short-term and long-term rentals, as well as leasing. Most of its revenues come from short-term leasing.
Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley were joint bookrunners for the IPO.