ZhengTong raises $470 million from Hong Kong IPO

Investors like ZhengTong's growth story, but the deal still prices below the mid-point.

China ZhengTong Auto Services has raised HK$3.65 billion ($470 million) from a Hong Kong initial public offering after pricing its shares slightly below the mid-point of the indicated range.

The company -- a BMW dealer and leading 4S (sale, spare parts, service and survey) dealer in China -- kicked off the roadshow on November 22 and fixed the price last Friday. During the two-week bookbuilding, investors became more careful and selective with regard to their investments amid concerns about tensions on the Korean peninsula and weak secondary market performance for some newly listed stocks in Hong Kong.

Worrying about the market conditions, Bluestar Adisseo Nutrition Group, one of the global leaders in feed additives for livestock, and China Datang Corporation Renewable Power, the green energy unit of the country’s second-largest power producer China Datang Group, both postponed their listing plans on November 24. However, Datang quickly changed its mind and returned to the market last Thursday with an aim of raising $879 million from a Hong Kong IPO.

ZhengTong's institutional tranche was five times covered and the Hong Kong public offering, which accounted for 10% of the total, was around 3.3 times subscribed. The latter means there will be no clawback (for that to happen the retail tranche would have had to be at least 15 times covered) and the split between institutional and retail investors will stay at 90:10.The institutional portion was mainly covered by Asia-based long-only and hedge fund accounts, according to sources.

The deal comes with a 15% greenshoe option which, if fully exercised, will allow the company to raise up to $542 million.

Investors were interested in the stock because ZhengTong's business covers three areas that all have good growth potential in China, one source said. The first is private consumption, which is something Beijing desperately wants to improve. It is also prioritised in the nation's next five-year plan.

Second is the booming high-end car market. ZhengTong focuses on premium brands such as BMW, Mini and Audi. Statistics show that the company ranked second in terms of the number of BMW 4S dealership stores in China in 2009 with 10 stores. It ranked 21st in terms of turnover last year in China's fragmented automobile dealership sector.

Third, the 4S shop business also fits with the service industry theme, which is another growth story in China, made attractive by growing household income and increased car ownership.

Nevertheless, investors were careful with regard to the size and price limits of their orders as they are concerned about the overall economic environment in the coming months, the source said.

ZhengTong sold 500 million shares at HK$7.30 apiece, which compares with a price range of HK$6.80 to HK$8.60. Based on its 2011 forecast earnings, the final price translates into a price-to-earnings (P/E) ratio of approximately 17 times.

By comparison, domestic competitor Zhongsheng Group is currently trading at 17.4 times. Zhongsheng raised $369 million in a Hong Kong IPO in March this year after pricing its shares near the bottom of the indicated range. BOC International, Morgan Stanley and UBS were the bookrunners for that deal. Zhongsheng closed at HK$18.80 on Friday, 88% above its IPO price.

ZhengTong will list on the Hong Kong stock exchange on Friday (December 10). CCB International and J.P. Morgan are managing the deal.

China became the world’s largest car market in 2009, several years earlier than expected, with approximately 8.8 million new automobiles sold. This is up from 4.5 million new automobiles sold in 2006.

China’s automobile market is expected to maintain its strong growth, with sales volumes of new automobiles expected to reach approximately 13.9 million units in 2012. The sales value is expected to reach Rmb1.9 trillion ($285 billion) in the same year, according to the Automobile Manufacturers Association.

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