China Yongda Automobile Services Holdings is back in the market, more than four weeks after pulling its initial public offering in Hong Kong due to a lack of demand and a sharp deterioration in sentiment towards Chinese auto dealers.
Sentiment towards the sector hasn’t really changed, evidenced by the fact that its peers have continued to fall, but similar to other mid-cap Chinese companies that have completed their IPOs during the past few weeks, Yongda is said to have secured sufficient demand pre-launch to ensure that this time the deal will get done.
The price and size of the offering has been cut as well, which was inevitable given that its key comparables have lost between 32% and 48% of their value since Yongda started bookbuilding the first time around on May 14. The company, which is the number one BMW dealer in China according to its prospectus, is now offering its shares at a fixed price of HK$6.60, which will result in a total deal size of HK$1.67 billion ($215 million).
The earlier version of the IPO sported a price range of HK$7.60 to HK$10.80, which implied a deal size of $306 million to $435 million.
The deal will be completed on an accelerated timetable and the syndicate banks started to accept orders from both institutional and retail investors on Friday last week. The order books close on Thursday, which will allow retail investors the usual three-and-a-half days to subscribe (Hong Kong was closed for a public holiday yesterday) and some time for the bookrunners to gather more institutional support as well.
However, like the other recent deals that were largely covered at launch — Huadian Fuxin Energy, China Nonferrous Mining and China Aluminum International Engineering (Chalieco) — Yongda isn’t expected to attract much additional demand from institutional investors beyond what it has already got.
That said, while the bookrunners weren’t planning to do another roadshow, interest from investors led them to change their mind and the management will now do a series of meetings in Hong Kong today and tomorrow, which is an encouraging sign at least.
The reduced price translates into a 2012 price-to-earnings multiple of 6.5 times pre-shoe, based on the joint bookrunner consensus, which is well below the eight to 11.3 times that the company sought in its initial deal. However, since the key comps have been falling too, Yongda is still not looking that cheap.
As of last Friday, China ZhengTong Auto Services was also trading at 6.5 times this year’s earnings and Baoxin Auto Group was at 5.9 times. Yongda is coming at a discount to Zhongsheng Group, which was quoted at 7.8 times at the end of last week, but with a market cap of about $2.3 billion Zhongsheng has the advantage of being quite a bit bigger than the other three. At the time of listing, Yongda will have a market cap of $1.3 billion, which puts it roughly in line with ZhengTong at $1.2 billion and Baoxin at $1.4 billion.
ZhengTong and Baoxin also focus primarily on the sale of BMWs. Zhongsheng is an authorised dealer for Mercedes-Benz, Lexus and Audi, as well as for mid-to-high end brands Toyota, Nissan and Honda.
Aside from BMWs, Yongda Auto also sells other international brands such as Audi, Jaguar, Land Rover, Cadillac, Toyota, Honda, Nissan, Volkswagen and Hyundai and according to research firm Roland Berger it ranked as the second-largest dealership group in eastern China last year in terms of sales volumes of luxury and ultra-luxury passenger vehicles.
Another potential red flag is the withdrawal of Oman Investment Fund as a cornerstone investor. According to the earlier prospectus, it was to have invested $30 million in the IPO. There was no explanation as to why it has dropped out and it is still possible that it is participating in the deal as an ordinary investor, without the lockup and disclosure obligations that comes with a cornerstone investment. However, its lesser commitment is clearly not a good sign.
Baring Private Equity Asia is staying on as a cornerstone, but in a reflection of the smaller deal size it will now buy $80 million worth of shares, compared to $96 million to $120 million previously. Yongda has also secured a new cornerstone investor in the form of a Hong Kong-based investment holding company controlled by Prax Capital, a private equity firm dedicated to China-focused investments. Prax will buy $24 million worth of shares.
Together, the two cornerstones will take up 48.4% of the IPO. In addition to that, the bookrunners are said to have a shadow book of primarily Chinese investors that should ensure the deal will be fully covered.
Meanwhile, the relaunched prospectus includes information about Yongda’s first-quarter earnings, which is no doubt an attempt to counter the concerns about rising inventories and faltering sales that have plagued the sector since mid-April. However, while this does give some idea about the start to the year, the first quarter ended three months ago and it seems unlikely that this historical data on its own will be enough to convince investors that the sector outlook is not as gloomy as other more recent data have suggested.
Revenues increased by 22.4% to Rmb5.1 billion ($805 million) during the three months to March 31, compared with the same period last year, which the company attributes mainly to an increase in revenues from passenger car sales and after-sales services as a result of the continued expansion of its dealership network. An increased proportion of luxury and ultra-luxury cars in its overall sales, particularly Porsches, Jaguars and Land Rovers, also contributed to a widening of its gross margin to 8.6% from 7%. Net profit improved by 72% to Rmb125.3 million.
The prospectus also states that “in the absence of any material adverse change to the macro-economic conditions in [China], the performance of [China’s] passenger vehicle dealership sector or other unforeseen circumstances, there will be no material change in our performance [in 2012 compared to 2011]”. But given that a slowdown in China’s economic growth and a slump in car sales is exactly what investors have been worrying about, it is hard to see how such a statement will offer much comfort or change anyone’s mind about whether to invest.
Yongda is offering 253.5 million shares, which accounts for 17.1% of the outstanding share capital (down from 20% in May). There is also a 15% greenshoe, which could potentially lift the total proceeds to $247 million. The base deal is made up of 79.9% new shares, while the rest of the shares will be sold by Wan Zhanggen, who will reduce his stake to 3.7% from 8.5%. Wan oversaw the company’s financials until he retired in 2009.
The deal will have the usual 90-10 split between institutional and retail investors and is subject to standard clawback triggers.
The trading debut is now scheduled for July 12. HSBC and UBS are global coordinators, as well as joint bookrunners together with Bocom International.
