Korean auto-parts maker raises $436 million from IPO

Mando Corporation, a Korean manufacturer and supplier of auto parts, managed to steer through last week's severe battering of global equity markets without so much as a scratch, raising W498 trillion ($436 million) from its initial public offering. The institutional offering was about 15 times covered, allowing the company, which specialises in brakes, steering and suspension systems and components, to fix the price just above the mid-point of the range at W83,000.

A source said there wasn't much price sensitivity and noted that the deal was covered across the W75,000 to W90,000 range -- a notable achievement in a week when share prices took a beating and several other IPOs, in Asia and globally, were either postponed or downsized. The trigger for the collapse in sentiment was the Greek debt crisis and concerns that it could spread to other countries as well. This could have a lasting negative impact on economic recovery, not just in Europe, but in the West as a whole. Korea, which as an export-dependent market is highly exposed to and influenced by what happens in the US and Europe, saw its benchmark index drop 5.4% during the week.

Investors participating in the Mando transaction appeared willing to overlook the immediate turbulence, however, and focus instead on the positive data from the car industry in the first quarter. On April 23, Kia Motors said its net profit more than quadrupled to W398.5 billion in the first quarter, thanks to strong sales at home and abroad. A day earlier, Korea's largest car maker Hyundai Motor reported that its net profit jumped almost five-fold to a record W1.12 trillion, mainly on the back of sales overseas. Hyundai and Kia are both part of the Hyundai-Kia Automotive Group, which is Mando's largest customer and accounted for 62% of its sales in 2009. Their improvements are clearly feeding through to Mando.

Thanks to increased sales, Mando posted an operating income of W72 billion in the first quarter, compared to an operating loss of W1 billion in the same period last year. Its net profit for the quarter amounted to W57 billion, versus a net loss of W9 billion last year. For 2009 as a whole, Mando generated a net profit of W109 billion.

The IPO was supported by several anchor orders, some large enough to cover the entire institutional tranche on their own (and not all of them were inflated), which obviously helped to boost the overall subscription ratio. The deal also saw a number of orders as a result of one-on-one meetings with the management, and many of the buyers were said to have been quality tier-1 accounts.

About 40-50 international investors participated, and overall there were more than 100 names in the order book. Asia, including Korea, accounted for about 70% of the demand, while the rest came from Europe and the US.

Meanwhile, the decision by the bookrunners to treat the 60% institutional tranche as one order book, instead of splitting it into two pre-determined tranches for international and domestic investors, helped generate price tension. It also pushed some domestic investors into submitting their orders early (Korean institutions typically don't come into IPOs until one or two days before the close), which helped build momentum in the book.  

"The bookrunners wanted to create proper demand and a proper price across both the international and domestic tranches. If you have a pre-allocation, each tranche will know that they have pricing power and will try to keep the price as low as possible," the source said. "In this case, the investors were told that the entire institutional tranche could go to domestic investors, or it could all go to international investors, depending on the demand."

In the end, 35% of the institutional tranche -- 21% of the deal -- was allocated to international investors, while 65% went to domestic accounts. According to sources, the split was a reflection of the demand as well as the company's wishes. The remaining 40% of the deal will be sold to retail investors and employees in a separate offering on Tuesday and Wednesday this week.

Compared with the two previous Korean IPOs, which both had an indicated international/domestic split from the outset, Mando sold a smaller portion of its shares to international investors, but the tension created through the bookbuilding supposedly helped to support a higher price. Samsung Life, which was priced in late April, sold 40% of the deal to international investors -- or two-thirds of the institutional tranche -- and 20% to domestic accounts, while Korea Life Insurance, which was completed in early March, allocated 39% of the institutional tranche internationally and 61% domestically. Korea Life had initially indicated that 49% of the shares would be offered to international investors, but the strong domestic demand prompted a re-allocation. At the same time, the price was fixed 8.9% below the initial guidance range.

Like Mando, Samsung Life priced above the mid-point of its price range (well above in fact), although observers viewed that range as being generous to begin with.

The Mando IPO comprised 6 million shares, or 32.9% of the company, of which 34.5% were new. The remaining 65.5% were sold by various existing shareholders, including Korean construction materials manufacturer KCC, which reduced its stake in the company to 17.1% from 30%. Mando is part of the Halla Group, which also has interests in the construction and building materials industries, and its single largest shareholder after the IPO will be Halla Engineering & Construction Corp with 22.5%. However, Mando's chairman, Mong Won Chung, who is effectively also the controlling shareholder of Halla Engineering, does control, directly or indirectly, 35.6% of Mando's share capital.

The IPO price of W83,000 translates into nine times 2010 projected earnings, or a discount of just over 5% versus Hyundai Mobis, which is viewed as its closest comparable. However, while Mobis derives as much as 90% of its earnings from Hyundai Motors and Kia Motors, which are both part of the same group, Mando also sells parts to the big three US carmakers, General Motors, Ford and Chrysler, to various European companies and to car manufacturers in emerging markets like China and India.

In 2009, Mando generated 20.7% of its sales from China and 9.2% from India. However, those figures include sales to Hyundai-Kia's overseas operations in those counties.

In its listing prospectus, Mando said it plans to focus on increasing its sales in emerging markets, including those in the Asia-Pacific region (primarily China and India), the Middle East and South America, which it believes offer the greatest growth potential.

"In such emerging markets, we intend to continue to seek strategic acquisition and joint venture opportunities, as well as conducting feasibility studies with respect to establishing new wholly owned manufacturing subsidiaries in strategic locations to deepen our market penetration, achieve economies of scale, increase our customer base, expand our geographical reach and reduce costs," the company said.

Aside from being more diversified than Mobis in terms of its customers, Mando also derives a larger portion of its sales from higher-margin business, analysts say.

The IPO was arranged by Citi, HMC Investment Securities, J.P. Morgan, and Woori Investment & Securities. The shares are scheduled to start trading on May 19.