China Harmony Auto launches Hong Kong IPO

The luxury auto dealer seeks to raise up to $315 million from the offering, while two more companies start investor education to test the appetite for new Hong Kong listings.
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China Harmony sells high-end cars such as Ferraris, mostly in Henan province
<div style="text-align: left;"> China Harmony sells high-end cars such as Ferraris, mostly in Henan province </div>

China Harmony Auto, a car dealership group that focuses exclusively on luxury vehicles in China, yesterday started the bookbuilding for its Hong Kong initial public offering with the aim of raising between HK$1.67 billion and HK$2.44 billion ($215 million to $315 million).

According to the current timetable, the institutional order books are expected to close on June 5 and the listing is slated for June 13. The Hong Kong public offering is set to start this Friday and continue until June 5.

The deal comes after auto parts maker Mando China decided last week to postpone its Hong Kong IPO of up to $270 million after a sharp drop in Asian stock markets on the last day of the bookbuilding. Investor attention was also diverted by two billion-dollar IPOs that were awaiting their respective trading debuts while Mando China was on the road. China Galaxy Securities and Sinopec Engineering had raised a combined $2.9 billion from their offerings.

Although the markets remain volatile, the Hang Seng Index, which rose 0.3% yesterday, is once again in positive territory year-to-date, albeit by a mere 0.1%. Galaxy Securities was unchanged yesterday at HK$5.56, which puts it about 5% above the IPO price. However, Sinopec Engineering remains 1.1% below its issue price after falling 1.3% to HK$10.38 yesterday.

China Harmony Auto’s IPO comprises 275.1 million shares, which represents about 25.1% of the enlarged share capital. The shares are offered at a price between HK$6.08 and HK$8.88 each, which, according to sources, values the company at a 2013 price-to-earnings ratio of eight times to 11.5 times.

There is a 15% greenshoe option that if exercised in full could increase the size of the deal to as much as $362 million. All the shares are new.

The company has signed up Anhui Investment Group as a cornerstone investor. According to the term sheet, it has promised to invest $50 million and is subject to a six-month lock-up. The commitment represents between 15.9% and 23.3% of the base deal, depending on the final price.

There are quite a few Chinese auto dealers listed in Hong Kong already, but Baoxin Auto, a BMW dealer, is viewed as the closest comparable as well as a key competitor, one source said. It is trading at a 2013 P/E multiple of 8.7 times, according to Bloomberg data. In terms of the valuation, China Harmony Auto and its bookrunners wanted to leave some money on the table to encourage investors to participate, given the current market conditions, the source notes.

China Harmony Auto offers 10 luxury and ultra-luxury brands at its outlets, namely BMW, Lexus, Rolls-Royce, Mini, Land Rover, Jaguar, Aston Martin, Audi, Ferrari and Maserati, according to the draft prospectus. The company is headquartered in Henan Province and all of its outlets were located in this province until November 2011, when it opened a BMW 4S store in Beijing. At present, 17 of its 25 outlets are located in Henan.

The company’s earnings have been growing steadily. It booked a net profit of Rmb350.7 million last year, up from Rmb112.7 million in 2010. The net profit margin was 6.2% and 6.3% in those years, respectively.

In addition to high profit margins, the growth in the wealthy population in China, as well as the company’s extensive distribution networks in Henan and its footprint in key markets, such as Beijing, are attractive selling points, the source notes.

Goldman Sachs is the sole global coordinator for the IPO, as well as a joint sponsor and bookrunner together with CICC.

Meanwhile, bankers started to test the appetite for two other Hong Kong IPOs yesterday. The largest of the two is hotel and casino operator Macau Legend Development, which is seeking to raise about $600 million ahead of a listing at the end of June.

The company, which is controlled by businessman and former Macau legislator David Chow, operates three casinos in Macau under a service agreement with Stanley Ho-controlled SJM Holdings. According to a source, it is raising capital to fund the construction of three new hotels with casinos at Fisherman’s Wharf, where it already operates the Legend Hotel and Babylon casino.

At present it also operates the Pharaohs Palace Casino and a casino at the Landmark Hotel elsewhere in Macau.

The company is looking to sell 25% of its share capital. The bookbuilding is currently scheduled to start on June 7.

CLSA is the sole sponsor as well as a joint global coordinator together with Citic Securities. Credit Suisse is joining them as a bookrunner.

The second company to start investor education yesterday was Freetech, a China-based asphalt pavement maintenance services company that was set up by a Hong Kong entrepreneur.

The deal size is expected to be roughly $100 million to $200 million. The roadshow is expected to kick off next Monday (June 3) and the listing is currently scheduled for June 19, according to a source. Most of the roads in China, including highways, are covered with asphalt, which creates a lot of business opportunities for the company, the person notes.

CICC and Citic Securities are arranging the deal.

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