China Yongda Automobiles Services Holdings, which was due to price its initial public offering after the US market close on Wednesday, has extended the institutional bookbuilding until Monday as it tries to find additional demand to complete the deal, sources say. The company, which is the number one BMW dealer in China, has made no changes to the original terms, so the deal size is still between HK$2.37 billion and HK$3.37 billion ($306 million to $435 million).
This comes after a couple of weeks of significant declines in global equity markets that has dampened investor enthusiasm for market newcomers, and after the chaos surrounding Facebook’s hyped-up debut in the US last Friday reminded investors that there are no sure bets in the current environment.
Chinese auto dealers have had a particularly tough time for a variety of reasons, including weaker economic data out of China, and the sell-off of the sector has been quite brutal. Baoxin Auto Group has lost 30% since Yongda started bookbuilding on May 14, including a 23.7% drop on May 16 alone after the company pulled a high-yield bond issue that had failed to price as planned the previous week.
Notably, China ZhengTong Auto Services Holdings was in the market at the exact same time with a very similar high-yield bond — up to $350 million, five-year maturity, high 11% yield guidance and Ba3/BB- ratings — which meant the two issuers were chasing the same investors at the time when the overall market was stalling. ZhengTong too failed to price its offering and pulled the deal on the same day as Baoxin.
ZhengTong is off 27.5% since the start of Yongda’s roadshow, while Zhongsheng Group Holding has fallen 10.7%. Like Yongda, both ZhengTong and Baoxin focus primarily on the sale of BMWs, while Zhongsheng is an authorised dealer for Mercedes-Benz, Lexus and Audi, as well as for mid-to-high end brands Toyota, Nissan and Honda.
According to sources, Yongda’s IPO was covered after two days, but as the sell-off of the comps intensified and global markets showed few signs of recovering, investors began to pull their orders. It was unclear how well covered the institutional order book was when it was due to close at 5pm New York time on Wednesday, but the talk was that the level of international demand was quite low, suggesting that Chinese investors account for a large portion of the order amount. Any potential incremental demand that may come in before the new deadline on Monday is also expected to come from China, or as one source put it: “from an international perspective, there is little advantage to keeping the books open for another few days.”
Yongda does have the support of two international cornerstone investors, however: the Oman Investment Fund, a Middle Eastern sovereign wealth fund, has committed to buy $30 million worth of shares, while Baring Private Equity will invest between $96 million and $120 million.
The fact that the price range hasn’t been lowered could suggest either that the issuer doesn’t really want to sell shares below the bottom end, or that the bookrunners don’t believe international investors are interested even at a lower price, at least not until the markets stabilise. One source said the hope is “to salvage the deal at the original terms” and noted that some investors needed a bit more time to consider the transaction. However, this doesn’t mean that they will end up putting in an order.
The Hong Kong retail tranche, which accounts for 10% of the deal and closed at noon on Wednesday (Hong Kong time), will not be affected by the extended bookbuilding for institutional investors. Since the terms haven’t changed, the bookrunners can supposedly extend the institutional bookbuilding until Monday without giving retail investors the possibility to withdraw their orders.
From an overall demand perspective, it would make little difference if retail investors were to withdraw their orders, however, since they didn’t really buy into the deal in the first place. According to sources, the retail tranche was less than 2% covered, implying that the Hong Kong public committed less than $1 million to the deal. Retail investors appeared sceptical towards the sector already when Baoxin went public in December, but committed significantly more money to that deal than to Yongda.
Baoxin raised $414 million after fixing the price at the bottom of the offering range. The 10% retail tranche was about 74% covered, which equals about $39 million worth of subscriptions. When Yongda kicked off its IPO, Baoxin was trading only 0.9% above its IPO price, which may have contributed to the lack of retail interest. After the drop in the past couple of weeks, it is now down 29.4% since its debut.
Yongda is trying to sell 312.2 million shares, of which 90% are new. They are offered at a price between HK$7.60 and HK$10.80 and account for 20% of the post-issue share capital. The deal also comes with a 15% greenshoe that is made up of 50% new shares and 50% secondary shares.
The price range translates into a 2012 price-to-earnings ratio of 8.0 times to 11.3 times on a pre-shoe basis and based on the joint bookrunner consensus earnings forecast — a valuation that is looking increasingly pricy as the comps are tumbling. Baoxin and ZhengTong, which traded at 9.8 times and 9.2 times respectively at the start of Yongda’s roadshow, are now quoted at 7.3 times and 7.1 times.
Zhongsheng, which is the largest of the three comps with a market cap of about $3.2 billion, has seen its valuation drop to about 10.2 times this year’s earnings from 10.8 times at the beginning of last week.
Yongda currently has 66 sales outlets and has authorisation from manufacturers to open another 25. In 2011, it sold more than 61,200 vehicles, which was almost double the 31,700 that it sold in 2009, demonstrating its rapid growth in recent years. That said, a top official at the China Automobile Dealers Association told Bloomberg in an interview earlier this week that inventories at Chinese car dealerships are increasing, suggesting that the increasing deliveries reported by the car manufacturers in the past two months are not matched by higher sales to consumers.
Aside from BMWs, Yongda Auto also sells other popular 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 east China and the third largest in the country overall last year in terms of sales volumes of luxury and ultra-luxury passenger vehicles.
If the deal manages to price on Monday, Yongda may still be able to start trading May 30 as scheduled. HSBC and UBS are joint global coordinators and bookrunners, and Bocom International is a bookrunner.
To be sure, Yongda isn’t the only IPO candidate suffering from the weak market environment. Copper producer China Nonferrous Mining Corp (CNMC), which is aiming to raise between $235 million to $314 million from a Hong Kong listing, decided not to launch its retail offering on Monday this week as planned. This effectively removed the deadline for the institutional bookbuilding and sources say the company is planning to keep the books open at least until the end of next week. This suggests that the retail offer could kick off early next week.
CNMC is part of state-owned China Nonferrous Mining Corp Group, but its mining business — three producing mines and one copper smelter — is located in Zambia. If successful, CNMC will be the first company to list African mining assets in Hong Kong, which adds to the challenge of getting investors to look at the deal at a time when global equity markets are generally weak.
Like Yongda, CNMC is also weighed down by falling comps, although not nearly to the same extent. Jiangxi Copper, which is the largest Chinese copper producer listed in Hong Kong, is currently trading at 6.7 times this year’s earning after falling 4.8% since CNMC kicked off its roadshow on May 15. This compares with an implied 2012 P/E ratio of 5.95 times to 7.9 times for CNMC.
The company is looking to sell 25% of its enlarged share capital in the form of 870 million new shares. They are offered a range between HK$2.10 and HK$2.80. The company has signed up three cornerstone investors who will buy a combined $70 million worth of shares in the deal
CICC, J.P. Morgan and UBS are joint bookrunners.
Separately, sources said that Inner Mongolia Yitai Coal received a listing approval from the Hong Kong stock exchange last night and is likely to start investor education early next week. The company, which already has B-shares listed in Shanghai, may raise as much as $1 billion. Bank of America Merrill Lynch, BNP Paribas, BOC International, CICC, Macquarie and UBS are joint bookrunners, although bankers say that several other firms continue to circle the issuer, trying to gain a spot on the deal.
Huadian Fuxin New Energy, the renewable energy arm of Chinese power producer Huadian, also had a listing hearing yesterday, but as of last night there was no information as to whether it passed. The company is looking to raise about $400 million to $500 million, according to the latest estimates and could possibly start investor education next week, if given the go-ahead by the Hong Kong exchange. Bank of America Merrill Lynch, Citic Securities and UBS are joint bookrunners.
