Zhongsheng Group Holdings, a leading car retailer in China, started its pre-marketing of a Hong Kong initial public offering (IPO) yesterday. This is after the country's food supplement maker Ruinian International offered a glimmer of hope for Hong Kong's IPO market when its stock price rose on its trading debut.
The auto dealership group, which makes a profit by buying middle-to-high-end cars from global auto manufacturers and sells them to the mass market in China, is offering roughly 25% of the company to the public and is aiming to raise between $800 million and $1 billion, sources familiar with the deal said.
The deal is coming at a time when investors have become more cautious about new shares after major offerings this year recorded weak secondary-market performance. Four of the six companies that have listed in Hong Kong this year are trading below their IPO prices, according to data provided by Bloomberg.
United Company Rusal, the world's largest aluminium producer, which raised $2.2 billion last month, fell more than 30% from its IPO price of HK$10.8 last week. It regained losses yesterday and ended at HK$8, still 25.9% lower. International Mining Machinery, which raised $327 million from its float in January, fell 23.5% from its offering price of HK $4.88 as of yesterday.
Hong Kong's benchmark Hang Seng Index ended 6.6% lower this year as of yesterday.
However, Ruinian International, a small-cap health-products provider, which raised $116 million last week, bucked that trend slightly. The stock ended 5.6% higher yesterday in its trading debut from its IPO price of HK$3 per share, which was just over an indicated range of HK$2.85 to HK$3.78.
"The market has been volatile since the beginning of this year, but consumption-related stocks are favoured by investors at the moment," said Vincent Chan, an analyst at Credit Suisse. "The market will continue to be bumpy for some time, but it won't stop new equities coming, though they will need to either reduce their target sizes or offer at discounted prices," he said.
Zhongsheng plans to start taking orders on March 3, according to sources. The share sale, which is arranged by BOC International, Morgan Stanley and UBS, is scheduled to be priced on March 12 with stock trading to start seven days after that (February 19).
Despite the large size of the deal, as of yesterday there was no participating cornerstone investor confirmed, sources said.
If successful, the company will become the first car dealership group listed on the Hong Kong stock exchange. There are no comparable stocks. The company should also be viewed separately from car dealers in the US because the automobile market in China is still in a rapid growth phase and the auto retail market, on a nationwide basis, is still very fragmented, BOC International (BOCI) said in a research report.
Almost all global carmakers have set up operations in China. Increasing competition would require automakers to improve their ability to retain customers and manage distribution networks, BOCI said.
"Dealers will play a critical role, as they handle the greater part of customer interactions," it added.
The investment arm of BOCI estimated Zhongsheng to be worth Rmb30.8 billion ($4.6 billion) to Rmb38.2 billion, representing 26.8 times to 33.2 times estimated 2010 earnings per share. It forecasted Zhongsheng's 2010 net profit at Rmb1.15 billion, more than double last year's Rmb467 million, as its network of dealerships expands and product choice improves.
China overtook the US last year as the world's largest automobile market with sales jumping 46% to 13.6 million, according to statistics from the China Association of Automobile Manufacturers.
However, some observers are worried that the growth last year, which was mainly driven by government purchasing incentives designed to boost consumption and secure an 8% economic increase, will not be repeated as the subsidies will be cut once that goal is achieved.
"The Chinese government may withdraw the incentive policy, but there's lots of room for development in China, the demand will remain strong," said Jeong Min Pak, an automobile analyst at Fitch Ratings.
"It is worth noting that sales of vehicles that are not subject to government incentives also recorded double-digit growth," said Jack Yeung, an automobile and components analyst at BNP Paribas, indicating benefit withdrawal will not diminish a buying spree completely.