Chinese car lender’s IPO drives a hard bargain

Yixin

19/03/2019 02:33

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Katrina Hamlin
    HONG KONG, March 19 (Reuters Breakingviews) - A luxury
Chinese car lender is driving a hard bargain with its initial
public offering. Fast-growing Shanghai Dongzheng Automotive
Finance  2718.HK  could be worth HK$11.2 billion  ($1.4 billion)
after the listing. That would value the company at a big premium
to lesser-performing rivals. But there are speed bumps ahead.
    Auto financing is becoming more popular in China, yet
penetration is at best 50 percent, S&P Global reckons. That
leaves ample room for growth, suggesting Dongzheng’s 74 percent
earnings increase in 2018 is no aberration. It managed that
despite an overall contraction in car sales in the country for
the first time in decades. The luxury segment, though, bucked
that trend, with Mercedes and Audi among those who managed to
flog more cars in the People’s Republic last year.
    Dongzheng zipped off a near-20 percent return on equity last
year, far better than the likes of Yixin and Cango, which
provide auto sales and financing services. It has access to the
interbank lending market and the People’s Bank of China’s credit
data, in return for tight regulation by the central bank. 
    Those data points help justify the premium the company is
shooting for. A price of HK$5.25 a share, the middle of the
indicated IPO range, could value Dongzheng at around 1.6 times
book value, based on estimates from a person close to the deal.
Refinitiv data shows comparable companies including Yixin
 2858.HK  and Cango  CANG.N  in China and U.S.-based Ally
Financial  ALLY.N  and Santander Consumer USA  SC.N  trade
almost flat to book, on average.
    That could be a bit racy. First, it might make Dongzheng
worth more than its HK$11 billion Hong Kong-listed parent, China
ZhengTong Auto Service  1728.HK , which owns 95 percent of the
finance unit’s stock.
    Second, Dongzheng and peers have yet to navigate a downturn.
Severe loan delinquency rates have been below 0.50 percent for
years, according to S&P, thanks in part to strong oversight. 
    On top of that, the company is targeting smaller Chinese
cities for growth. It’s harder to source credit profiles there
than for the country’s mega metropolises, a difficulty
acknowledged in its prospectus. 
    Rapid growth and a push into new markets have often been a
sign of lending excess. Potential investors need to work out
when they think Dongzheng might have to slam on the brakes.
    On Twitter https://twitter.com/KatrinaHamlin
 
    CONTEXT NEWS
    - Shanghai Dongzheng Automotive Finance, which provides
loans for car buyers in China, is planning an initial public
offering in Hong Kong to raise up to HK$3.4 billion (US$428
million), according to a prospectus filed with the stock
exchange on March 14. At the middle of the range, the listing
would value the company at HK$11.2 billion.
    - Parent company China ZhengTong Auto Service, already
listed on the Hong Kong Stock Exchange, owns 95 percent of
Dongzheng’s shares, the filing says. Its market capitalisation
was HK$10.8 billion at close of business on March 14.
    - CICC and Credit Suisse are joint sponsors of the deal.
    - For previous columns by the author, Reuters customers can
click on  HAMLIN/  
    - SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: http://bit.ly/BVsubscribe

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Dongzheng Auto Finance launches HK IPO of up to HK$3.36bn – IFR 
   urn:newsml:reuters.com:*:nL3N2100JK
Dongzheng prospectus     http://www3.hkexnews.hk/listedco/listconews/SEHK/2019/0314/LTN20190314039.pdf
BREAKINGVIEWS - Car lenders’ real risk is fines, not writedowns 
   urn:newsml:reuters.com:*:nL8N1P031N
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Antony Currie and Sharon Lam)
 ((katrina.hamlin@thomsonreuters.com; Reuters Messaging:
katrina.hamlin.thomsonreuters.com@reuters.net))