Books have opened for China Rundong Auto Group ahead of its Hong Kong initial public offering, with the issuer experiencing solid anchor demand in the first day of bookbuild.
The Chinese luxury automobile dealership aims to raise up to $138 million pre-greenshoe by selling 268.6 million shares between HK$3.58 and HK$3.98 per unit under the leads of Bank of America Merrill Lynch and Morgan Stanley. Some 91% of the shares will be primary, with the remaining 9% secondary, according to a term sheet seen by FinanceAsia.
An exercised greenshoe option would boost the deal size to $159 million and tack on an additional 40.3 million shares, all primary. There will be a traditional 90/10 split between the institutional and local retail tranches, which are subject to a clawback should demand warrant it.
The selling shareholder is Runda, a trust company created for Rundong employees’ stock incentive programme. It currently owns 3.6% of the company. After the flotation, its ownership will drop to 0.6%.
The issuer and syndicate have locked in a handful of anchor investors during the wall-cross process, mostly long-only institutional investors, a banker close to the deal told FinanceAsia, who noted that demand is robust enough to warrant the accelerated timetable. The deal will price on August 5 and list on August 12.
Rundong Auto, which distributes luxury brands including Jaguar, BMW, Ferrari and Land Rover, is looking to float 25% of enlarged share capital and will be worth between $496 million and $550 million.
Thirty percent of the IPO proceeds will go towards paying existing bank loans — as of March 14, Rundong Auto’s debt stood at Rmb2.7 billion ($437.3 million). The issuer will also use the proceeds to fund future acquisitions and build new distribution stores for BMW, Mini, Land Rover and Jaguar in the Jiangsu province near Shanghai.
At HK$3.58 to HK$3.98, the company is being marketed at 6 to 6.6 times its 2014 earnings and 4.2 to 4.7 times its 2015 earnings, a discount to its comparables, which on average are trading at 8.6 times 2014 earnings.
Investors have a variety of comparables when considering Rundong Auto. China ZhengTong Auto is the closest in terms of valuation, with the company trading at a 2014 p/e of 7.35 times.
Baoxin Auto Group meanwhile is trading at 9.31 times its 2014 earnings, while China Yongda Auto Service Holding Company is trading at 9.97 times and Zhongsheng Group Holdings, 11.48 times.
All are in the red this year, likely a result of China’s slowing GDP growth, although some have fared better than others. While shares in Yongda Auto and Zhongsheng are only down 1% and 5% respectively, China ZhengTong Auto shares have declined 13% up to July 31, and Baoxin Auto’s shares have dropped 14%, according to Bloomberg data.
China’s passenger vehicle market has grown rapidly in the past few years, another industry reliant on the rising affluent and their desire for all things luxury.
The mainland became the second largest passenger vehicle market globally in 2007, and the largest in 2009, a position it maintains today. Its sales volume is more than twice the size of the US market. From 2009 to 2013, new vehicle sales grew at a compound annual growth rate (CAGR) of 18.7% in China, more than double the US’s 8.6% in the same time period.
Slowing GDP growth aside, China’s car sales are forecast to grow at a CAGR of 9% from 2013 to 2018, according to All China Marketing Research (ACMR), an independent market research consulting firm.
Even with the record growth in vehicle sales, China’s passenger vehicle market is still new and penetration rates remain low.
Importantly for a car dealership such as Rundong is the growth in the luxury and ultra-luxury passenger vehicles sales. In 2013, China was the second largest market for Maserati and Ferraris, and the world’s largest market for Audi, BMW, Land Rover and Jaguars.
Sales volume for BMWs, for example, increased at a CAGR of 31.7%, from 158,489 units in 2010 to 362,100 units in 2013. This compares with a CAGR of just 10.6% for BMW’s global market in the same time period. It’s a similar story for the other luxury dealers, according to ACMR’s research.
China Rundong Auto Group is the latest mainland company seeking to float its shares in Hong Kong. Menswear firm China Fordoo Holdings priced its shares in the mid-range in a flotation in July, while Cosmo Lady, a Chinese lingerie manufacturer, and high-end women’s fashion designer Koradior Holdings, also successfully listed in July.
Luye Pharma Group and social video platform operator Tian Ge Interactive Holdings each priced their flotations at the top end of the range, while Beijing Digital Telecom, one of the mainland’s largest mobile handset and digital product store chains, and Beijing Urban Construction Design & Development Group, priced at the bottom.