Zhongsheng prices IPO near low end of range

Chinese car retailer Zhongsheng Group Holdings has raised HK$2.86 billion ($369 million) from its Hong Kong initial public offering after pricing the deal towards the low end of the offering range. The money raised is significantly below the company's initial target; the deal was reduced from an early plan to raise up to $1 billion when the bookbuilding opened after a week's delay.

The delay, which was caused by a combination of volatile markets and the inability of the company and the bookrunners to agree on an appropriate valuation, and the negative press surrounding it looks to have had a negative impact on the demand from retail investors in particular. According to sources, the 10% retail tranche was fully subscribed, but not enough to trigger a clawback, which would have required it to be 15 times covered. No further details were available, but the suggestion seemed to be that the subscription ratio was close to one times.

This was in sharp contrast to another Hong Kong IPO that also closed on Friday -- home appliance retailer Huiyin Household Appliances -- which saw its 10% retail tranche more than 600 times covered. This deal was significantly smaller at only HK$540.5 million ($70 million), but the large subscription meant it still attracted $4.2 billion worth of retail capital. Even if Zhongsheng's retail tranche would have been 15 times covered, this would only have translated into $550 million of demand. Huiyin, which was offered at a significant discount to industry leader Gome Electrical Appliances, also attracted close to 200 institutional investors and priced its offering at the top of the offering range. BNP Paribas was the sole bookrunner.

Zhongsheng generated better interest among institutional investors, with close to 125 names in the order book. Demand came from high-quality investors with the allocation skewed towards the top accounts. Most of the demand came from Asia, followed by the US and Europe in that order.  

Following a ruling from the Hong Kong stock exchange, the split between the institutional and the retail tranches was altered slightly, with 89.3% going to institutions and 10.7% to retail. The reason was that the exchange wanted the shares earmarked for retail investors to account for 10% of the IPO plus the shares sold outside the deal to General Atlantic, an existing shareholder who bought $25 million worth of stock to prevent its 15% stake from being diluted.

Dalian-based Zhongsheng sold 286.2 million new shares, or 15.5% of its enlarged share capital, through the IPO. The final price was set at HK$10, which valued the company at 14.9 times its projected earnings for 2010, based on the consensus forecast by the three bookrunners. The shares were offered in a range between HK$9.54 and HK$12.83.

There is a 15% overallotment option that could increase the total proceeds to a maximum of $452 million.

The company is a play on the increase in consumer wealth in China and more particularly on the expected acceleration of the country's booming car market. China's passenger-car sales jumped 55% in February from a year earlier, partly because consumers sought to buy a new car or get their old ones replaced before the Chinese New Year holiday, which began on February 14.

Zhongsheng is the major sales and service agent for Toyota, having been granted dealership rights by the Japanese automotive giant in 1995. The recent problems at Toyota, which have resulted in recalls of cars in China, was said to have made some investors stay away from the transaction. However, the company also makes a profit from buying middle- to high-end cars from other global auto manufacturers and selling them to the mass market in China. It operates 47 so-called 4S shops, referring to sale, spare-part, service and survey, and plans to open 28 new 4S shops and acquire another 20 this year.

Zhongsheng's trading debut is scheduled for March 26. BOC International, Morgan Stanley and UBS were the joint bookrunners.