Brilliance China Automotive Holdings is aiming to spin off its engine-manufacturing unit, in which it owns 42.5%, for a separate Hong Kong listing. According to a source, the deal may raise about $100 million and bankers are planning to start investor education on Monday.
Some 25% of the unit, which is called Xinchen China Power Holdings, will be sold to the public, reducing Brilliance China’s stake to about 31.9%. Bank of America Merrill Lynch is mandated as the sole bookrunner.
Separately, property development and highway infrastructure company Hopewell Holdings said before the Chinese New Year holidays that it has obtained approval from the Hong Kong stock exchange to spin off its wholly-owned property development and hospitality business in Hong Kong through an initial public offering.
The listing of the unit, which will be named Hopewell Hong Kong Properties, is expected sometime in the second quarter. Hopewell, which is controlled by local business tycoon Gordon Wu, has hired BOC International and Credit Suisse as joint sponsors and bookrunners for the IPO.
The fact that two Hong Kong-listed companies are looking to spin off parts of their existing businesses at roughly the same time suggests that issuers are starting to feel more comfortable about the state of the Hong Kong IPO market, following a poor sentiment for new listings during most of last year.
Six companies have raised a combined $798 million from Hong Kong listings so far this year, with almost half coming from the $399 million IPO of greenfield mining company Chinalco Mining Corp International.
The demand has been okay at the bookbuilding stage, but aftermarket performance has been pretty weak. PanAsialum, which makes aluminium casings for iPads and raised $160 million, fell 13.1% on its first day of trading last week and is currently down 17.7% versus its IPO price, while Chinalco Mining has lost 9.7% since it started trading on January 31.
Also, property developer Golden Wheel Tiandi, which gained 21.4% on day one, has since been on a declining trend and at the end of last week closed 3.6% below the IPO price. The company raised $98 million ahead of the listing.
Time Watch Investments is the only one among the major new listings that is trading above the IPO price, although a 2.2% gain in four days isn’t exactly spectacular. The company, which designs and makes watches, raised $104 million from its IPO.
However, Brilliance Auto and Hopewell no doubt hope that their well-established engine and property businesses will fare better, given their long and solid track records.
Hopewell HK Properties
Hopewell said in an announcement last Friday that the spin-off will create a more defined business focus both for Hopewell HK Properties and for Hopewell Holdings itself, which will be focusing mainly on property development and investment in China. The parent company also owns a 1.2 gigawatt coal-fired power plant in the Guangdong province and a 68.1% stake in Hong Kong-listed Hopewell Highway Infrastructure, which builds and operates expressways, tunnels and bridges in China’s Pearl River Delta region
The separate listing will help establish Hopewell HK Properties as a pure-play premium property platform and brand in Hong Kong, and will increase its financing flexibility by giving it direct access to the capital markets. It will also provide better clarity of Hopewell HK Properties’ credit profile for rating agencies and financial institutions that wish to lend against the credit rating of a Hong Kong development and investment company, Hopewell said.
The money raised from the IPO will be used mainly for capital expenditure for projects already under development, such as Hopewell Centre II — its HK$9 billion ($1.2 billion) hotel and commercial project in Wan Chai — as well as for future opportunities.
As with all spin-offs, the parent company also hopes that the spin-off will release hidden value for its existing shareholders. Hopewell didn’t specify how much of Hopewell HK Properties it intends to sell, but said it expects to remain the controlling shareholder with a stake of at least 51%, meaning that it — and its current shareholders — will benefit from any increase in valuation of the property unit as well as from its performance and future growth.
The spin-off will include a preferential offering to its existing shareholders, Hopewell said. Shareholders will also get to vote on the proposed spin-off at an extraordinary general meeting.
Hopewell HK Properties currently has 10 key properties (completed or ongoing) in its portfolio, including its flagship Hopewell Centre, the QRE Plaza, and the ongoing Lee Tung Street redevelopment project, which are all located in Wan Chai. The latter comprises 835,000 square feet and is being developed in a joint venture with Sino Land.
After the spin-off, Hopewell will have two property assets in addition to its stake in Hopewell HK Properties: Hopewell New Town, a residential and commercial project in Guangzhou; and the Liede Integrated Commercial Project, which is located in Guangzhou’s commercial business district. The company said it intends to continue to identify new projects in China and overseas to drive its future growth.
Hopewell doesn’t currently break out the results for its Hong Kong property business, but including the two projects in China, revenues from property development, leasing and management, as well as hotel and restaurant operations accounted for 37% of its total revenues of HK$6.56 billion in the full year to June 30, 2012. The same businesses accounted for 43% of the earnings before interest and tax, which stood at HK$2.14 billion.
Xinchen China Power Holdings
According to a draft listing document posted on the Hong Kong stock exchange website on Friday, Xinchen China is one of the leading manufacturers of engines for passenger cars (PV) and light commercial vehicles (LCV) in the independent branded segment of the China market in terms of sales volume. It develops and sells both light-duty petrol and diesel engines and focuses on engines with a high performance-to-price ratio, as well as low fuel consumption, emissions and noise, for the mid- to low-end auto market.
In 2011, it had a 9.4% share of the independent branded market, which in turn accounted for 13.8% of the total PV and LCV engine market, according to a Frost & Sullivan report quoted in the document. And its market position hasn’t materially changed since then, the company said.
Its top customers in the past three years were Brilliance China, the Huachen Group (which is the controlling shareholder of Brilliance China), Zhengzhou Nissan, Xiamen Golden Dragon, and GAC Changfen. Brilliance China and Huachen together accounted for 44.6% of its total revenues in the nine months to September last year, but the company did have 29 other customers as well.
Xinchen China was initially a 50-50 joint venture between Brilliance China and state-owned Wuliangye, through an entity called Xinhua Investment, and the two parties currently own 42.544% each. After the IPO, their respective stake will fall to 31.908%.
The rest is held by Dongfeng Engineering Motors (4.914%), which has a joint venture with Xinchen China to manufacture engines for Dongfeng’s light duty vehicles, and by a company called Lead In (9.998%) that was set up to hold company shares as part of an incentive scheme for management, directors and senior employees.
The company’s net profit has increased from Rmb58.3 million ($9.3 million) in 2009 to Rmb260.4 million in 2011 and Rmb223.8 million in the nine months to September 2012.
Brilliance China is a Hong Kong-listed red-chip that makes cars, minibuses and auto components. It operates a car-making joint venture with BMW and a minibus-making joint venture with Toyota. The company hasn’t outlined what it hopes to achieve with the spin-off, although Xinchen China is in the process of constructing new production facilities in the Sichuan province and some of the money raised from the IPO will likely go towards this project.
When these new facilities become fully operational in September this year, they will boost Xinchen China’s production capacity to 300,000 engines per year, from 255,000 at present.