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 per cent, S&P Global reckons. That leaves ample room for growth, suggesting Dongzheng’s 74 per cent 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 per cent 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 and Cango in China and US-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 per cent 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 per cent 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. — Reuters
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