Toyota sales agent puts $1 billion IPO on hold

Bankers blame the current market conditions for Zhongsheng's decision to postpone the deal, but analysts say lofty price expectations by the issuer also played a role.

Zhongsheng Group Holdings, Toyota's major sales and service agent in China, which was supposed to start a roadshow yesterday for its up to $1 billion Hong Kong initial public offering (IPO), has put the deal on hold.

The Dalian-based auto retailer, which has represented Toyota under a dealership agreement for the past 15 years, booked more than 50% of its revenue from selling the Japanese brand in China as of September 2009, according to industry watchers.

The troubled Japanese carmaker expanded its vehicle recall to China last month, and is collecting nearly 700,000 cars in the country -- the largest recall ever made by Toyota in the world's fastest growing car market. Toyota's cars are selling at retail prices of between Rmb190,000 ($27,800) and Rmb270,000 on the mainland and avid buyers often pay Rmb20,000 extra in order to speed up delivery. 

The recall is adding significant pressure on Zhongsheng's 2010 earnings, which would otherwise have doubled compared to the previous year, according to an estimate by BOC International. The investment banking arm of Bank of China also predicted that Zhongsheng would open 28 new so-called 4S shops, referring to sale, spare-part, service and survey dealerships, this year and acquire another 20.

Bankers involved in the deal blame current "market conditions" for the IPO being called off after one week of pre-marketing. But analysts said there were other reasons for the delay too, including the fact that the issuer was aiming for too rich a valuation.  

"Zhongsheng intended to offer shares at a P/E (price-to-earnings ratio) of 21 times based on its 2010 projected earnings. It's a high valuation given the current situation and it would have made it difficult for the deal to go through," said one auto analyst. "After the car recall, the company will need to have its balance sheet re-audited which takes time and increases the listing costs. As an intermediary, Zhongsheng has a very passive role," he added.

The auto dealership group, which also profits from buying cars from other global auto manufacturers and selling them to the mass market in China, planned to raise between $800 million and $1 billion by offering roughly 25% of the company to the public.

A company spokeswoman confirmed the IPO had been delayed and that there is no time table for when it will resume.

Zhongsheng's IPO, which was being arranged by BOC International, Morgan Stanley and UBS, was initially scheduled to price on March 12. The trading debut was set for March 19.

Shares of recent Hong Kong IPOs have tumbled amid market volatility and lacklustre investor demand. As of yesterday, Hong Kong's Hang Seng Index had fallen 4.3% since the beginning of the year and the Shanghai Composite Index had dropped 4.5%.

"There are still more equity supply coming to the market this year. If the price is correct, large IPOs and share offerings will find buyers," said Lorraine Tan, head of research for Standard & Poor's Equity Research, in a telephone conference yesterday.

"We see decent upside by the end of this year in both Shanghai and Hong Kong stocks. We will watch carefully given the ongoing policies. There will be volatility and corrections along the way," she said.

Zhongsheng was the first company in China to be granted dealership rights by Toyota and founded its wholly-owned subsidiary Dalian Zhongsheng Toyota Motor Sales in 1995, according to China Auto Dealers Chamber of Commerce.

Over the past few years, Zhongsheng has established solid relationships with leading global car brands including Mercedes-Benz, Lexus and Audi.

China's auto dealership industry is still relatively immature, and there is plenty of room for expansion and consolidation, BOCI said in a research note.

China widened its lead over the US as the world's biggest auto market in January, with passenger car sales almost doubling from a year earlier to 1.32 million vehicles, the China Association of Automobile Manufacturers said. By comparison, US auto sales rose a modest 6% in January from a 26-year low of 656,976 the year before, industry reports show.

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