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|19 March, 2019

Chinese car lender's IPO drives a hard bargain

Fast-growing Shanghai Dongzheng Automotive Finance could be worth $1.4bln after the listing

Sports utility vehicles (SUVs) waiting to be exported are seen at a port in Lianyungang, Jiangsu province, China April 5, 2018. Image used for illustrative purposes.

Sports utility vehicles (SUVs) waiting to be exported are seen at a port in Lianyungang, Jiangsu province, China April 5, 2018. Image used for illustrative purposes.

REUTERS/China Stringer Network

HONG KONG  - A luxury Chinese car lender is driving a hard bargain with its initial public offering. Fast-growing Shanghai Dongzheng Automotive Finance 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.

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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 and Cango in China and U.S.-based Ally Financial and Santander Consumer USA 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, 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.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Antony Currie and Sharon Lam)

© Reuters News 2019

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