21 March 2019

Meidong Auto signals turn onto IPO on-ramp

It has a meager 0.1 percent market share but China Meidong Auto Holdings Ltd. (01268.HK) is the latest car dealer lining up to join the convoy of initial public offerings this month, aiming to take advantage of the auto market recovery and improved IPO sentiment.

Meidong is expected to have a market capitalization of about HK$1.8 billion (US$231 million) after the listing, making it one of the smallest.

But even its bigger rivals are not so big. Zhongsheng Group (00881.HK), one of the largest dealers, is valued at a bit over HK$20 billion. The company sold more than 184,000 new cars last year, accounting for about 1 percent of China’s total car sales.

Mainland Chinese are becoming richer and, in addition to the main metropolises, there are lots of opportunities to sell cars in smaller cities. That’s why Meidong, which started out in the southern manufacturing hub of Dongguan, has every reason to be bullish about the future.

Yet, it is not difficult to notice that Meidong is not alone. Hundreds, if not thousands, of such dealers could be contemplating the same route to expand their funding channels and open more shops across China.

So, many more like Meidong are likely to tap the market to fuel their network expansions. Businesswise, that means more competition for customers, dealerships, sites and staff. With that intensifying competition, individual performances can vary wildly and picking the winners won’t be easy.

Mainland-listed heavyweight Pang Da Automobile Trade (601258.CN) is just one that sank into the red last year. It turned around in the first half but earnings were still a long way from its best days. Listed in 2011 at an adjusted price of 18 yuan, the counter last changed hands at about 6 yuan apiece, only one-third of its IPO price.

New share supply is another issue. Scarcity value will be even thinner on the ground if dealers keep coming to list. Supply is bound to rise as companies place additional post-listing shares in response to favorable valuations or to meet a pressing need for funds.

Pang Da is probably the worst stock in the segment, but hardly the only underperformer. Zhongsheng debuted in 2010 at HK$10.00 and issued more shares at much higher levels in following years. Its shares last traded at HK$10.7, translating into a marginal return for a three-year period.

ZhengTong (01728.HK), Baoxin Auto (01293.HK) and China Harmony Auto (03836.HK) were less fortunate cases, dubbed “submarines” among Hong Kong stock investors for trading below their respective IPO offers.

– Contact the writer at [email protected]



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