FUND RAISING: Car Inc Raises $500 Mln, Thrives On Rentals
Bottom line: Strong pricing for a large new bond from Car Inc reflects good potential for companies in China’s secondary car market, which should see strong growth as new car sales slow.
Let’s take a brief break from Internet companies to look at recently listed auto rental specialist Car Inc (HKEx: 699), which has excited the market with a new $500 million bond offering. Despite its earlier setbacks, including an aborted previous IPO, Car Inc has done quite well since its listing last September, as Chinese car-related plays find a strong audience among international investors. Interest seems especially strong toward car companies that target the second-hand market, as new car sales look set to slow sharply due to China’s slowing economy and restrictions being imposed by many cities to control pollution.
According to a company announcement, Car Inc sold the $500 million worth of 5-year senior notes at a relatively high yield of 6.125 percent. (English article; HKEx announcement). Car didn’t give very specific plans for what it will do with the funds, but I expect a big part of the money will go to expand its fleet and consolidate its position as China’s leading car rental firm.
Car Inc had originally planned to offer the notes with a yield of around 7 percent, so the fact that the final rate was quite a bit lower indicates demand was relatively strong. The sale marked the first such junk bond offering of the year by a Chinese company, even as questions have loomed over similar debt from some of the nation’s struggling real estate companies.
The fund-raising roughly doubles the $467 million that Car raised in its Hong Kong IPO last September. (previous post) That offering also did quite well, pricing at the top of its range and rising sharply in its trading debut. The stock has continued to do well since then, and Car’s shares are now up 42 percent above their offering price.
This kind of play into the secondary car market should do quite well in the new few years, as the market for new car sales starts to slow. Growth in China’s new car market is expected to decelerate this year after a couple years of strong gains, partly due to the nation’s slowing economy and also due to restrictions on new license plates in major cities like Beijing, Shanghai and Shenzhen.
That should be good news for Car, which could benefit from a growing number of consumers who decide that renting may be preferable and much cheaper than buying and maintaining a new car. Car-related websites that offer listing and other services also look set to benefit. A leader in that space is Autohome (NYSE: ATHM), which made an IPO in late 2013 and whose shares are up 120 percent from their offering price. Another car site, 51auto.com earlier this month landed $30 million in new funding, again attesting to the sector’s strong potential. (previous post)
But it’s also worth noting that investors aren’t just blindly throwing their money at such companies. A noteworthy example is eHi (NYSE: EHIC), another car rental firm which made a New York IPO late last year and then saw its shares drop steadily. They are now down nearly 20 percent from their offering price. The road hasn’t been completely smooth for Autohome either, as its shares were previously up much more and have dropped about 35 percent from an all-time high last August.
So, what’s the bottom line in all this? The answer is that these car-related companies should do well as a group, but it’s also important to look at their individual management and valuations. Perhaps most importantly, Car Inc and Autohome are both profitable, whereas eHi is still losing money. We’ll have to see how their financials look when all 3 companies report their next earnings, but I do expect that all should see strong revenue growth over the next 2-3 years.
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