The IPO of China's second-largest automaker was priced yesterday (November 29) at HK$1.60 per share, just shy of the midpoint of the deal's HK$1.45-$1.80 indicative range. The CICC, Deutsche Bank and Merrill Lynch-deal raised $590 million (post shoe) and was four times covered by institutional investors and seven times overall. At 2.5 times covered, retail interest was relatively muted.
Due to Dongfeng's links with major Japanese car makers Nissan and Honda, the Japanese public offer without a listing (POWL) saw especially strong demand, with orders totaling $1.9 billion. The POWL ended up with just under 5% of the final allocation.
"Given the demand of the past two days, the deal could have been priced at HK$1.65, but there was a feeling that this was a deal where it was desirable to incorporate an equity kicker," says one specialist.
He adds that this was an important consideration given the postponement or cancellation of several recent primary market deals, despite a reasonably stable performance from the Hang Seng Index.
About 40% of the orders came from Asia, while 30% each came from the EU and the US. French, Italian and German accounts were conspicuous thanks to their knowledge of the auto sector via their national manufacturers.
A total of 140 accounts were involved, of which seven put in orders of 10% of the total deal. The one-on-one conversion rate was 70%.
In terms of final allocation, 65% of the deal went to the ten largest accounts in the book and 82% went to the 20 largest accounts. The remaining 18% went to 77 accounts, many of them tier-one players. About 43 accounts were blanked, on the basis that they had little visibility, or their orders were puny.
"It looks like there is a muted feel to the market as we get towards the end of the year, and that ended up screening out the more speculative element," says one specialist.
While it's a tough sector, specialists said that a number of factors came together in the last two days of bookbuilding.
"Investors liked the company's numbers. It was a pleasant surprise for them," says one.
In particular, Dongfeng Motor's wide range of commercial and passenger vehicles convinced investors that here was a player who could weather market turmoil.
Dongfeng is the No.1 player in the commercial heavy and medium sector, with a 30% share and No.2 in the light commercial sector. The strength in the commercial vehicle sector was especially attractive, as it is less crowded than the passenger vehicle sector and margins are thus higher.
Investors also got comfort from dealing with a company whose sheer size puts in the top three of China's carmakers.
"In terms of distribution, national coverage, and high level government support, players like Denway Motors simply can't compete," says one specialist.
"I wouldn't describe this as a blowout deal," he adds. "But raising half billion dollars was a pretty strong achievement given the turmoil in the China auto sector."
At HK$1.60 per share, the deal was valued at 9.1 times 2005 earnings.
