Warburg Pincus raises $401m via Car Inc placement

The US private equity firm was one of the cornerstone investors in the Chinese auto rental company's IPO last autumn.

Private equity firm Warburg Pincus pared down its stake in Car Inc and raised $401 million Wednesday night in Hong Kong after pricing shares toward the middle of the initial range. 


The private equity firm, which was a cornerstone investor in Car Inc's autumn initial public offering and an investor since 2012, sought to take advantage of surging stock markets and strong share price performance in Hong Kong to cash in on sharp gains. Year-to-date, Car Inc is up 89.8%, and since its September flotation, shares have jumped 132.7%. 


The mainland car rental company backed by Hertz also reported a net profit in 2014 for the first time in three years, contributing to the ripe conditions for Warburg Pincus to cash in on gains. 


On offer were 140 million shares at HK$18.35 to HK$18.90 per unit, representing a 4.4% to 7.2% discount to the May 27 close of HK$19.78 per share, according to a term sheet seen by FinanceAsia


Allocations were still being finalised early Thursday morning, but the shares priced at HK$18.50 per unit, a 6.5% discount to the last close. Demand warranted exercising the upsize option and boosting the total shares on offer from 148 million to 168 million, or 7.1% of the existing share capital, according to a source close to the deal. This tacked on an additional $67 million to the base deal size.

The book was multiple times over-subscribed, with over 110 lines participating in the deal. Global long-only institutional investors, China-focused funds and hedge funds made up the bulk of the deal.


Allocations were skewed towards early anchor investors and existing shareholders, the source told FinanceAsia.


Credit Suisse, Morgan Stanley and CICC handled the share sale of the company formerly known as China Auto Rental. There is a 90-day lockup for Warburg Pincus. 


The deal launched amid recent run-ups in Hong Kong's stock markets. Sell-down volumes in Hong Kong hit an all time high of $3.6 billion in April, according to Dealogic data. High sell-down volumes are mainly due to investors primarily private equity firms seeking to take advantage of the spike in stocks to offload stakes in Chinese companies, such as Hony Capital's $1.26 billion share sale of its 23% stake in CSPC Pharmaceutical on April 16, and US private equity firm's Carlyle's $425 million decision to cash in on a near-four year investment in Haier Electronics Group on April 15. 


Despite blistering markets in the past few weeks, there have been pull-backs. After surpassing the 4,000 mark on April 27, Hong Kong's Hang Seng Composite Index fell 2.3% up to May 18. It has recovered some of these gains, however, rising 2.1% to date.


Shanghai Stock Exchange Composite Index similarly retreated 8% from May 4 to May 7 but has since risen by 19.4%. 


Potential investors in Car Inc had to decide whether the recent bull market in Hong Kong and China is experiencing a temporary pullback or has run its course. They also likely questioned how much upside was left in the mainland car rental company formerly known as China Auto Rental. 


In the case of Car, existing shareholders and anchor investors were more keen to top-up their stakes than new investors.



Much of the demand garnered around the Chinese rental company during the roadshows leading up to its IPO was centered on its growth potential. Car has a 30% market share in what sources say remains a very under-penetrated market, while some of its global peers have less growth potential and trade at higher price-to-earnings ratios. 


Car has also significantly outperformed its global comps, although is trading at high p/e comparatively. Year-to-date, Car has returned 89.8% and is trading at 33.69 times 2015 earnings.


Localiza Rent a Car, Car’s closest peer, is currently trading at 15.8 times 2015 earnings, with shares down 27% so far this year up to May 26.

Avis Budget Group, a much larger global player but still considered a peer, is trading at 15.06 times its 2015 earnings, and has plummeted 20.4% up to May 27, while Hertz is trading at 33.77 times its 2014 earnings and has fallen 18%. 

Warburg Pincus, as well as four institutions, pledged a combined $130 million in Car ahead of its IPO. The other cornerstones were US asset management firm Waddell & Reed Financial, hedge fund Falcon Edge Capital, investment management firm Hillhouse Capital Group and Hertz itself. Another major shareholder is Legend Holdings, according to Warburg Pincus's website.

Ahead of the flotation, Car had yet to 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 largely due to its high discount policy — a strategy the company implemented to rapidly boost its market share as China’s car rental industry remained in the infancy stages. Losses in 2013 meanwhile came from quickly expanding its fleet.

Things appear to be turning around for the rental company however. Car reported a net income of Rmb436 million in 2014, following three consecutive years of net losses. Total revenues meanwhile increased to Rmb3.52 billion last year, compared with Rmb2.7 billion the year before.

It has continued this momentum in the first quarter, reporting net revenue of Rmb177 million in the first three months of 2015, compared with Rmb98 million for the same prior-year quarter.

And its future appears bright. China's short-term self-drive rental market — the sector Car focuses on — is forecast to grow at a compound annual growth rate (CAGR) of 27% from 2013 to 2018, according to the company's prospectus. 

Its short-term rental fleet grew from 43,836 vehicles as of December 2014 to 49,346 vehicles as of March 31, 2015, according to its most recent earnings report, with the company using its IPO proceeds to boost the fleet. In addition, its average daily rental rate increased from Rmb260 to Rmb275 in the first quarter over the fourth quarter, while its average daily rental revenues per short-term vehicle rose from Rmb160 to Rmb175 in the same time frame. 

Warburg Pincus says Car is the only car rental company with network coverage across all provinces and provincial-level municipalities of China, with nearly 700 service locations in 66 major cities and 90 major airports and high-speed train stations across the country.


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