Great wall of money powers GWA

Great Wall Auto overwhelmed by retail interest despite the threat of lawsuits from Nissan.

BNP Paribas Peregrine priced a 114 million share IPO for Great Wall Auto (GWA) just off the top of its indicative range yesterday after receiving demand in excess of HK$184 billion ($24 billion) for the HK$1.52 billion ($195 million) deal.

After marketing the offering at HK$10.05 to HK$13.40 per share, pricing was settled just below the top of the range at HK$13.30 in order to give the deal a secondary market kicker. This was hardly needed, however, given levels of investor demand, not seen since the bubble days of pre-handover Hong Kong and the dotcom era.

Institutional books closed over 60 times subscribed and retail books 670 times, prompting full clawbacks. This Hong Kong IPO mechanism favouring retail investors was one of the key drivers of the deal's momentum and will see domestic investors allocated 50% of the total.

On the institutional side, about 150 to 200 accounts are said to have participated with a rough geographical split of 45% Asia and an equal split between Europe and the US.

Aside from the spectacular trading performance of recent IPO's, investors are also said to have been attracted to a reasonable valuation despite huge share prices increases across the sector year-to-date. GWA has been priced at a discount to peers in the Chinese auto sector and in particular Qingling Auto, which is said to be its nearest comparable.

At HK$13.30 per share, GWA has been priced at 12.5 times 2003 earnings compared to a 23.37 times level for Qingling, which has a much lower growth rate and margin. Both companies operate in the fast growing pick-up and sport utility vehicle space, although Qingling concentrates on high end products and GWA low end.

However, while Qingling only reported a 5.4% net margin in 2002, GWA came in at 20% thanks to greater cost advantages and higher growth forecasts. According to BNPP research, GWA's turnover is expected to grow by a CAGR of 41% from 2003 to 2005 and earnings by a more impressive 47% over the same time frame thanks to better economies of scale and volume expansion.

Since 1999, the company has had a dominant 30% market share in pick-ups, with demand fuelled by low end products priced at Rmb100,000 and below. As BNPP's research points out, "Today, China's pick up trucks represent a tiny 3% of total motor vehicle sales, well below the US's 15%. Assuming this portion increases progressively to 6%, China's pick up truck sales will reach 0.6 million by 2010, translating into a 25% CAGR over 2003 to 2010."

From 2004, the company will pay a dividend equivalent to 30% of net income. Pre greenshoe, public investors will own 25.05%, with Nadayun Management Centre on 32.98% and founder Wei Jian Jun on 41.97%. Alongside the lead, co-leads were China Southern, Citic Kawah, DBS and HSBC.

Trading will begin on December 15.

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