eHi Car Services, the Shanghai-based car hire and chauffeuring company, has kicked off formal roadshows and secured three private placement investors ahead of its planned US flotation.
Dongfeng Asset Management, a subsidiary of Dongfeng Motor Corporation, Kunyu Capital and Chinese travel service Ctrip Investment Holding have pledged a combined $50 million in the fast-expanding but still loss-making company, according to a banker close to the deal.
The three investors will purchase 15 million shares in total and are subject to a six-month lockup.
A further 10 million American Depository Receipts, all primary, are being offered on the New York Stock Exchange at between $12 and $14 per unit. Pricing is scheduled for November 13 following a week of roadshows under the leads of JP Morgan and Goldman Sachs.
Together with the $50 million pledged by the three private placement agents — the American equivalent of cornerstone investors in Hong Kong — the total size of the initial public offering could rise to $190 million.
In addition, there is a 15% greenshoe option that could lift the deal size still further.
The 25 million shares represent 24% of enlarged share capital of eHi Car Services, making for a market capitalisation of between $699 million and $810 million.
Based on the targeted $12 to $14 price range, eHi Car’s valuation is estimated by the syndicate at between 5.9 times to 6.8 times 2015 Ebitda. The company has yet to report a profit, which is why the valuation is calculated using Ebitda, the banker said.
Where are the comps trading?
Although larger than eHi Car, CAR Inc is seen by the syndicate as the issuer’s main comparable.
If CAR’s recent Hong Kong flotation is anything to go by, eHi Car will have little difficulty garnering interest from investors.
CAR Inc, the company formerly known as China Auto Rental, identified five cornerstone investors ahead of its 426.3 million share offering in September.
One of the cornerstones was US car rental firm Hertz, which at the time owned 20% of CAR. Combined the cornerstones pledged $130 million and, ultimately, left few shares for other investors. There were more than 350 institutional lines in the book, which allowed the issuer to exercise the greenshoe option and tack on an additional 64 million shares. Shares priced at the top of the range.
Similar to eHi Car, CAR did not report 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 due to its high discount policy, a strategy the company implemented to rapidly grow its market scale as China’s car rental industry remained in the infancy stages.
The losses in 2013, meanwhile, were a result of rapidly expanding its fleet.
But CAR now appears to be on the upswing after increasing its daily rental rate, improving brand recognition and boosting its customer base. It reported a 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.
Investors running the rule over eHi Car will also note CAR’s solid aftermarket performance post-listing, even as global equities have gone through a turbulent few weeks. CAR shot up 29% on its market debut and is currently still up 35% from the time of its IPO. It is now trading at 45.37 times its 2014 earnings.
eHi Car’s revenues rose 47% year-on-year to Rmb384.5 million in the first six months of 2014, with over two-thirds of the company’s revenues coming from car rentals.
But the company has yet to post a profit, a fact that may keep investors at bay. The company suffered losses of Rmb175.7 million in 2012, Rmb152.2 million in 2013 and Rmb20.7 million in the six months up to June 30, 2014.
eHi Car’s losses follow the rapid expansion of its nationwide service network and infrastructure. So if demand for car rentals does not increase as quickly as anticipated, or if demand declines, the company will be unable to generate sufficient revenues to offset the costs, eHi Car said.
In addition to providing car rentals and services throughout the mainland, eHi Car also offers airport pickup and drop-off services, inter-office transfers, and other business transportation services, such as promotional tours and special events for corporate clients.
The company's rental fleet increased from 7,717 in 2012 to 15,409 in June 2014. It plans to use IPO proceeds towards boosting its fleet further.
China’s car rental and car service industry has experienced rapid growth in recent years. According to Frost & Sullivan, the country’s car rental market revenues grew from Rmb9.4 billion in 2009 to Rmb26.7 billion in 2013, representing a compound annual growth rate of 29.8%. Revenues are forecast to total Rmb51 billion by 2017.
The industry is still in the early stages of development and this leaves plenty of growth potential for companies such as eHi Car.