China Rundong Auto Group priced its shares at the bottom of the range in its Hong Kong initial public offering, relying on institutional support to get the deal done.
The Chinese luxury automobile dealership raised $124 million after selling 268.6 million shares at HK$3.58 each, the bottom of the HK$3.58 to HK$3.98 range.
Demand from international institutional investors allowed the syndicate to boost the international tranche to 96.8% from 90% originally, according to a term sheet. Bankers close to the deal noted that the institutional book was oversubscribed, with the investors, a mix of long-only institutional investors, hedge funds and private banks, buying 241.8 million shares in the company during the accelerated bookbuild. The geographic split was heavily skewed towards Asia.
It was a different story for the retail tranche, which remained undersubscribed. Hong Kong local investors only took up 3.2% of the final book, one banker said.
This was in stark contrast to last week’s IPO of WH Group, a pork producer that attracted strong retail demand on its second attempt at a flotation. The retail tranche was oversubscribed by 54 times, prompting the syndicate to trigger the 10% clawback set aside for Hong Kong investors, up from 5% originally.
Rundong Auto did not have that kind of luck, but the auto dealer locked in a handful of anchor long-only institutional investors during the wall-cross process, which allowed the syndicate to carry on with an accelerated timetable despite the weak take-up from the retail tranche.
“We launched the deal with good anchor orders and at the end, were still able to generate demand,” the banker told FinanceAsia. “The retail take-up was not fully subscribed, but I think the company expected that. Apart from WH, retail [investors] have not been that active.”
Ninety-one percent of Rundong Auto’s shares were primary, with the remainder secondary. The selling shareholder Runda, a trust company created for Rundong employees’ stock incentive programme, managed to offload its 3.6% stake in the company, bringing its stake down to 0.6%. Bank of America Merrill Lynch and Morgan Stanley led the transaction.
Rundong Auto, which distributes luxury brands including Jaguar, BMW, Ferrari and Land Rover, floated 25% of its enlarged share capital and now has a market capitalisation of $496 million. At HK$3.58, the company is trading at 6 times its 2014 earnings, and 4.2 times its 2015 earnings, a discount to its comparables, which on average are trading at 8.6 times 2014 earnings.
Timing
Rundong Auto’s flotation comes amid news that China’s National Development and Reform Commission will take action against Audi and Chrysler, as well as a number of Japanese autoparts makers, for violating the country’s anti-monopoly laws, according to media reports. Since 2008, the mainland has intensified laws against anti-competitive pricing on companies across a number of industries, including pharmaceuticals and electronics. In the case of Audi and Chrysler, regulators argue that the two auto manufacturers have been selling both parts and vehicles at unfairly high prices.
It clearly wasn’t ideal timing for Rundong Auto to float its shares — the dealership distributes both BMW and Chrysler. However, sources argue this makes the company’s IPO even more impressive.
The outlook for luxury cars is bright. The mainland’s passenger vehicle market has grown rapidly during the past few years as China’s affluent — and their desire for luxury items — increases steadily. Sales volumes for all of the cars Rundong Auto distributes experienced double-digit growth rates. Audi sales rose from 225,588 units in 2010 to 491,989 units in 2013 in China, accounting for 31.2% of the global market.
Investigations are continuing and the long-term effect of these antitrust laws remains unclear. However, they may eventually result in heavy duties on the manufacturers, which could have a trickle-down effect among dealerships.
IPO market
Hong Kong’s IPO market has experienced a boost in activity during the past two months, capped off by WH Group’s successful floatation last week. It was the second-biggest IPO in Hong Kong this year, after tycoon Li Ka-shing raised $3.1 billion through an IPO of Hong Kong Electric Investments earlier in January. China CNR Corp‘s $1.3 billion IPO is the third-largest this year, followed by Harbin Bank‘s $1.1 billion listing and Luye Pharma‘s $764 million flotation, according to Dealogic.
Despite activity picking up in Hong Kong’s IPO markets, it has been a mediocre year for the Hang Seng Index, which is up just 3% year-to-date.
