Dongfeng raises HK$3.97 bln in Hong Kong IPO
(bloomberg.com)
Updated: 2005-11-30 15:55

Dongfeng Motor Group Co., China's third-biggest automaker, raised HK$3.97 billion ($512 million) in an initial public offering in Hong Kong, completing a sale that was delayed a year as industry profits declined.

The company, which makes Nissan, Honda and Citroen cars and is based in central China's Wuhan city, sold shares at HK$1.60 each, or 9.1 times its 2005 forecast profit, said bankers involved in the sale. They asked not to be identified before a public announcement. Denway Motors Ltd., which makes Honda cars in southern China, trades at 9 times projected 2005 earnings.

Discounts and rising competition in the world's third- biggest vehicle market have caused profit margins at China's carmakers and parts makers to halve this year, according to government estimates. Price cuts will probably continue, investors such as Agnes Deng said.

"People are worried about capacity expansion and weaker- than-expected demand growth," said Deng, who helps manage $3 billion of Asian stocks at Standard Life Investments Asia in Hong Kong and declined to say whether she bought Dongfeng shares. ``Price cuts are happening to the whole sector.''

Dongfeng's IPO, the sixth biggest by a Chinese company this year, is the first by an automaker in Hong Kong since Great Wall Motor Co. raised $225 million in December 2003. Chinese share sales totaled $19.5 billion this year, dominated by a $9.2 billion IPO by China Construction Bank Corp., the nation's third-largest lender.

Dongfeng will be the biggest Chinese carmaker listed outside the country when its shares begin trading in Hong Kong on Dec. 7.

Other IPOs

Shanghai Automotive Industry Corp., which makes cars in China with Volkswagen AG and General Motors Corp., is also planning a share sale. The company was aiming to raise about $1 billion in an IPO, people familiar with the plan said last year.

Dongfeng had planned to sell shares last year with a target of raising $1 billion.

``Sentiment in the industry is still weak because people expect the price cuts to continue,'' said Pauline Dan, declining to say if she bought Dongfeng shares for the $3 billion she helps manage at Manulife Asset Management in Hong Kong. ``New vehicle supply is huge as automakers have stepped up their capacity, which will peak this year.''

Capacity

China's 120 automobile assemblers can produce 8 million vehicles every year, with another 2.2 million units of annual production capacity under construction, according to Chen Bin, vice director of the National Development and Reform Commission's industry department. Vehicle sales may rise as much as 13 percent this year to 5.6 million units.

Dongfeng's profit fell 11 percent to 660 million yuan ($82 million) in the six months ended June 30, as higher material costs reduced margins.

The company is forecasting net income this year of at least 1.52 billion yuan, or 18.36 cents a share, sales documents show. It plans to pay between 15 percent to 20 percent of its profit as dividends next year.

Boosting Margins

Last year, 5.1 million cars, trucks and commercial vehicles were sold in China, making the country the world's third largest market for vehicles after the U.S. and Japan.

Sales of passenger cars may grow about 10 percent in 2006, according to a government forecast, slowing from the 76 percent surge in 2003 and 50 percent increase in 2002.

Dongfeng aims to boost sales to make up for declining margins, and to maintain its 13 percent share of China's vehicle market. The company plans to spend $2.1 billion to raise annual production by about 65 percent by 2008, according to a share- sale document.

The company plans to introduce at least 10 new passenger car models by 2008. Dongfeng's vehicles in China include Nissan's Sunny and Bluebird sedans, Honda's CR-V sport-utility vehicles, and Citroen's Picasso compact vans.

The carmaker is including its ventures with Honda Motor Co., Nissan Motor Co. and PSA Peugeot Citroen in the share sale.

Denway, which makes Accord sedans, Fit compact cars and Odyssey minivans in China with Tokyo-based Honda, in September reported its slowest half-yearly profit growth in six years. Combined first-half profit at China's vehicle assemblers and parts makers fell 49 percent to 22 billion yuan as automakers cut prices to bolster sales.

Dongfeng Shares

Dongfeng, which marketed the shares at between HK$1.45 and HK$1.85 each, attracted about $2.9 billion of orders from investors. Institutional investors ordered $2.7 billion of shares while Hong Kong's individual investors demanded about $120 million of stock, bankers said.

The company sold 2.48 billion shares, or 30 percent of enlarged share capital, in the sale.

Standard Chartered Private Equity Ltd. subscribed $50 million of shares and Temasek Holdings Pte., Singapore's state- run investment company, bought $40 million of stock.

China International Capital Corp., Deutsche Bank AG and Merrill Lynch & Co. arranged the share sale.

The assembler, which borrowed 4.6 billion yuan to buy back shares in 2004, will use almost 90 percent of the proceeds from its share sale to repay the debt, its sale document said.