Auto dealer testing the waters on HK initial public offering

08:55, February 23, 2010      

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Chinese automobile dealer Zhongsheng Group Holdings Ltd yesterday started testing demand for a Hong Kong initial public offering (IPO) that could raise as much as $1 billion, said three people with knowledge of the planned sale.

The company, based in Dalian, Liaoning province, plans to start taking orders on March 3, said two of the people, who declined to be identified because the information is private. The share sale may fetch $600 million to $1 billion, the three people said.

Zhongsheng is coming to the market as investors have become more selective in buying shares in IPOs. Hong Kong's benchmark Hang Seng Index has fallen 7 percent this year. Four of the six companies that went public in the city in 2010 are trading below their IPO prices, according to data compiled by Bloomberg.

China overtook the US last year as the world's largest automobile market with sales jumping 46 percent to 13.6 million, according to the China Association of Automobile Manufacturers.

"Almost all global carmakers have set up operations in China," said a BOC International Holdings Ltd (BOCI) report dated Feb 19, which predicted increasing competition would require automakers to improve their ability to retain customers and manage distribution networks.

"Dealers will play a critical role, as they handle the greater part of customer interactions," it added.

Zhongsheng operates 47 "4S" car dealership shops around China for mid-end to luxury brands including Mercedes-Benz, Lexus, Audi and Nissan, according to the BOCI report. "4S" means sales, spare parts, service and survey, said BOCI, which is arranging the share sale with Morgan Stanley and UBS AG.

Zhongsheng ranked as the fourth-largest Chinese auto dealer by revenue in 2008, with 1.2 percent of the domestic market, the report said. Its number of "4S" outlets more than tripled from 15 in early 2006, and they are concentrated in better-off northeastern, eastern and southern coastal cities.

BOCI said it expects the company to open 28 new dealerships this year and acquire 20 others.

Valuation

The investment banking unit of Bank of China Ltd estimated Zhongsheng to be worth 30.8 billion yuan to 38.2 billion yuan, representing 26.8 times to 33.2 times estimated 2010 earnings per share. It estimated Zhongsheng's 2010 net profit at 1.15 billion yuan, more than double last year's 467 million yuan, as its network of dealerships expands and product mix improves.

Penske Automotive Group Inc, the second-biggest US dealer group, trades at 13.4 times this year's estimated earnings per share, according to data compiled by Bloomberg. Bloomfield Hills, Michigan-based Penske operates more than 310 dealership franchises, mostly in the United States and United Kingdom.

The top 10 Chinese auto dealership groups controlled 11.4 percent of China's total passenger car sales in 2008, BOCI said. It said Zhongsheng should be valued higher than its US peers because of China's surging vehicle sales and the likelihood of the largest domestic players to emerge as national leaders in a hitherto fragmented market.

The share sale is scheduled to be priced around March 12 with stock trading to start March 19, one of the people added.

Zhongsheng Chairman Huang Yi and Wang Yinggang, a Hong Kong-based spokesman for BOCI, couldn't be reached for comment. Morgan Stanley and UBS spokesmen in Hong Kong declined to comment.

Source: China Daily
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