China Harmony Auto raises $215 million from Hong Kong IPO

The luxury car dealer prices at the bottom of the range, while Wuzhou International is forced to reduce the retail portion of its $179 million offering.
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China Harmony focuses on the sale of luxury cars, such as Ferraris
<div style="text-align: left;"> China Harmony focuses on the sale of luxury cars, such as Ferraris </div>

China Harmony Auto, a car dealership group that focuses exclusively on luxury vehicles in China, has raised HK$1.67 billion ($215 million) from its Hong Kong initial public offering, after fixing the price at the bottom of the indicative range. The stock is set to start trading on Thursday.

The retail and institutional tranches were both fully covered. The institutional portion attracted demand mostly from Asia, including global accounts that placed orders from their Asian offices, a source says, adding that some high-net-worth individuals also came into the order book.

The Hong Kong retail portion was about 1.6 times subscribed, the source notes, which means 10% of the base deal went to retail investors as planned, while the remaining 90% was allocated to institutional investors.

The company 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 23.3% of the base deal, based on the final price.

The bookbuilding for the IPO concluded on Wednesday US time, but the final price wasn’t announced until Friday Hong Kong time. According to the source, the slight delay was due to the management having to fly back from the US to have the pricing meeting in Hong Kong, and not an indication that the deal was struggling.

The price was fixed ahead of the monthly US non-farm payroll data that were released later on Friday and were closely watched by investors because of their potential effect on the Federal Reserve’s stimulus programme. Hong Kong’s Hang Seng Index finished Friday’s trading 1.2% lower, bringing its year-to-date fall to 4.8%, and other Asian markets were also down ahead of the US data.

However, US stocks climbed more than 1% on Friday after the employment data, which eased worries that the Fed might start tapering its stimulus programme earlier than expected.

China Harmony sold 275.1 million shares, which represent about 25.1% of the enlarged share capital, at HK$6.08 per share. There is a 15% greenshoe option that, if exercised in full, could increase the size of the deal to $248 million, based on the final price. All the shares are new.

The deal was marketed in a range between HK$6.08 and HK$8.88, which, according to sources, valued the company at a 2013 price-to-earnings ratio of eight times to 11.5 times.

There are quite a few Chinese auto dealers listed in Hong Kong already, but among them Baoxin Auto, a BMW dealer, is viewed as the closest comparable, as well as a key competitor. It is currently trading at a 2013 P/E multiple of around 9.5, according to Bloomberg data. In terms of the valuation, China Harmony and its bookrunners wanted to leave some money on the table to encourage investors to participate, given the market conditions, the source said at the time of the launch.

China Harmony 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 China’s 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.

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

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

Wuzhou International
Despite extreme stock market volatility that has unnerved investors globally, there has been a steady flow of IPOs hitting the Hong Kong market in recent weeks. Wuzhou International was another company that followed a similar timetable as China Harmony.

The Chinese property developer raised HK$1.39 billion ($179 million) from its offering after attracting mostly friends and family-type investors. It fixed the price near the bottom of the range.

According to a source, the retail tranche was only about 60% covered, however. That forced the company to reduce the size of the Hong Kong retail tranche to 6% of the deal from the original 10% and meant that institutional investors were allocated 94% instead of 90%. About 30 to 40 institutional investors came into the deal, the source adds.

Wuzhou International sold 1.14 billion new shares, which represent 25% of the company, at HK$1.22 each. The shares were marketed in a range between HK$1.15 and HK$1.50. The deal also comes with a 15% greenshoe option that could increase the total proceeds to about $206 million.

Bocom International and Macquarie were joint global coordinators for the deal, and they were joined by First Shanghai and GF Securities as bookrunners. The company will start trading on Thursday, the same day as China Harmony.

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