China’s largest car rental company, China Auto Rental, has decided to brave the soggy appetite among US investors for Chinese companies and move forward with its plan to list on Nasdaq. Bankers working with the company started pre-marketing for a US initial public offering on Tuesday this week with the aim of kicking off a management roadshow after Easter, although the exact timetable has yet to be set.
According to company filings with the US Securities and Exchange Commission (SEC), the company may seek to raise up to $300 million, but the final deal size will obviously depend on the valuation. Also, the management hasn’t yet decided how big a portion of the company it is going to sell.
Aside from the fact that US equity markets have been a bit weaker for the past three days, the key challenge will be to convince US investors to put money into a Chinese company. As indicated by the IPO of online Chinese retailer Vipshop Holdings last week, the allegations of fraud and accounting irregularities that led to a sharp sell-off of US-listed Chinese stocks in the second and third quarters last year are still weighing on the sector. And investors don’t seem convinced that the growth potential outweighs the risks at this point.
Vipshop was forced to price its IPO 23% below the initial price range, but even more damaging, the stock has fallen every day since its listing last Friday. When New York trading closed earlier this morning, it was quoted at $4.355 – down 33% from the IPO price of $6.50 and well below the initial price range of $8.50 to $10.50.
Investors who were talked into participating in that trade will likely think twice before they open their wallets for yet another Chinese newcomer.
That said, China Auto Rental ticks a lot of boxes that US investors used to like about Chinese companies: it operates in an industry that US investors are familiar with from their home market; it is the largest player in this industry in China by several metrics, including fleet size, network coverage, number of customers and revenues; it is the first company from the China car rental sector to seek a listing in the US; and it is growing quickly.
Investors are also likely to welcome the fact that China Auto Rental isn’t a variable interest entity (VIE) – a structure that is used by many Chinese companies to get around China’s foreign ownership restrictions in certain sectors, including Internet-based services. Following suggestions last year that the government is planning to overhaul this system, investors have been taking a cautious view with regard to VIEs as it is still unclear whether any new rules will apply to companies that are already listed. However, there are no foreign ownership restrictions in the auto rental sector and China Auto Rental is the direct owner of all its onshore businesses, which should be a comfort for investors.
One thing China Auto Rental isn’t, however, is profitable. In 2011, its net loss expanded to Rmb151.4 million ($24.1 million) even though revenues increased more than five-fold to $123.3 million. However, a source said the management is expecting to generate a profit this year.
The company is about 64.5%-owned by an affiliate of Legend Holdings, a major investment holding company in China and the parent company of Hong Kong-listed computer manufacturer Lenovo. US investors are familiar with Lenovo because of its successful takeover of IBM’s personal computer unit in 2005. Since Legend first invested in China Auto Rental in August 2010, it has provided strong financial support and the company still has outstanding borrowings from Legend or from other financial institutions guaranteed by it, of about Rmb2.28 billion ($362.4 million).
Most of the rest of the company is owned by chairman and CEO Charles Zhengyao Lu, who founded the business in September 2007.
China Auto Rental has a rental fleet of 25,845 vehicles, which as of the end of 2011 was three times as many as its biggest competitor and as many as the next eight car rental companies combined, according to third-party consulting firm Roland Berger. Its network of 520 service locations covers 66 cities spread across all of China’s provinces and 52 major airports. It is active within short-term and long-term rentals, as well as leasing. Most of its revenues come from short-term leasing.
China’s car rental industry is still at an early stage of development, but it is growing rapidly, driven by the growth in the overall economy, increases in urbanisation and disposable income, improvements in road infrastructure and a favourable policy environment. Among other things, there are policies in place that limits the car ownership by government agencies, meaning they have to rent many of their vehicles instead.
There are also a lot of private individuals in China who have a driver’s license, but don’t own a car. According to the National Bureau of Statistics the country had 151.3 million licensed drivers at the end of 2010, while there were only 61.2 million registered passenger vehicles.
At the same time, the number of rental vehicles as a percentage of the total number of registered passenger vehicles is significantly lower in China than in more mature markets, which, according to the company’s draft prospectus, suggests significant growth potential. And in contrast to more mature markets, the majority of car rentals in China is for business use, while leisure use and replacement rentals constitute a smaller, but rapidly growing percentage of the total market, Roland Berger notes in the same document.
China Auto Rental’s IPO is being arranged by Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley.
