Zhongsheng resumes IPO, but halves the size

The Chinese car dealer decides to sell a smaller portion of its enlarged share capital at this time, believing that the stock will command a higher valuation in the long term, sources say.

Zhongsheng Group Holdings, Toyota's major sales and service agent in China, resumes its Hong Kong initial public offering (IPO) today after a one-week delay and a reduction in the targeted size to less than half of what was originally planned.

The Dalian-based company is offering 286.2 million new shares, or 15.5% of the enlarged share capital, and is hoping to raise between HK$2.73 billion and HK$3.67 billion ($352 million to $473 million).

That represents a substantial reduction in the deal size. Zhongsheng previously planned to offer 25% of the company to raise up to $1 billion, but the IPO was suspended before the roadshow, which was scheduled for last Wednesday. The roadshow will now kick-off today.

The market is becoming more "constructive" now, making it possible to resume the offering, but the size has been reduced because the company believes that in the longer term the stock will have a higher valuation, a banker involved in the deal said.

"They don't see the need to sell that much of the company right now, but they still want to raise capital for acquisitions or to grow their business," he said.

Aside from the general market sentiment, another thing that has changed is that AIA Group's up to $15 billion Hong Kong IPO, which was expected to be one of the largest listings in the world this year, will not happen after Prudential agreed to buy the company for $35.5 billion.

Investors who were lining up to buy AIA, the Asian life insurance business owned by American International Group, may now need to turn to relatively smaller share offerings instead.

Zhongsheng's offering price will range from HK$9.54 to HK$12.83, which translates into a price-to-earnings ratio of 14.2 to 19.1 times, based on the company's 2010 projected earnings.

General Atlantic, an investment firm that holds 15% of Zhongsheng, will participate in the offering to prevent its holdings from being diluted to 12% after the IPO, a source said. He didn't say how much the firm is looking to buy, but noted that it has committed to acquire the shares at the IPO price.

The deal, which has a greenshoe option of 15% that could boost the total proceeds to a maximum $545 million, is being arranged by BOC International, Morgan Stanley and UBS. Despite the size of the offering, there are no cornerstone investors involved.

The deal is scheduled to price on March 19 and the stock is slated to begin trading on March 26. If successful, Zhongsheng will be the first Chinese car dealer to list on the Hong Kong stock exchange.

When Zhongsheng put the deal on hold last Tuesday there were concerns that the company's connection with Toyota would make it difficult to attract investors. The company was granted dealership rights by Toyota in 1995, the first among its domestic competitors, and founded its wholly owned subsidiary Dailian Zhongsheng Toyota Motor Sales that same year.

The auto dealer, which makes a profit by buying middle- to high-end cars from global auto manufacturers and selling them to the mass market in China, operates 47 so-called 4S shops, referring to sale, spare-part, service and survey. It will open 28 new 4S shops and acquire another 20 this year, BOC International said in a research note.

The growth of China's booming car market is likely to accelerate; China's passenger-car sales jumped 55% last month from a year earlier partly because consumers sought to buy a new car or get their old ones replaced before the Chinese New Year holiday, which began on February 14.

The China Association of Automobile Manufacturers reported yesterday that demand for cars, multi-purpose vehicles and sports-utility vehicles increased to 942,900 units in February. Total vehicle sales, which include buses and trucks, rose 46% to 1.21 million.

The government's extension of subsidies for consumers who trade in old vehicles and allowances for rural residents to buy cars, also supported growth, the association said.

"We sold about 10% to 15% more cars than the same time last year. Cars eligible for the government's subsidies are especially popular," said a regional manager at Dongfeng Nissan, who oversees 20 of the joint venture's 4S shops in the south of China. 

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