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Harmony Auto defies dim market outlook

Chinese luxury car dealer hopes to fetch HK$2.4b from initial public offering despite analysts pointing to weak interest in industry

PUBLISHED : Thursday, 30 May, 2013, 12:00am
UPDATED : Thursday, 30 May, 2013, 3:55am

Another luxury car dealer, another growth story about the mainland's luxury car market? China Harmony Auto Holding, BMW's largest dealer in central China, hopes the story will fetch it HK$2.44 billion in the capital market.

But investors may already be tiring of the yarn, according to some analysts.

BMW said last month sales growth was expected to slow in its largest market, from 40 per cent last year to a high single digit this year.

Rivals Baoxin Auto Group and China ZhengTong Auto Services Holdings - BMW's largest dealers on the mainland - saw their share prices slump 30 and 40 per cent, respectively, since listing in 2011 and 2010.

Harmony Auto is striving to expand its clientele to diversify risks. In the past two years, it became the distributor for six more brands, many of them premium ones including Rolls-Royce, Ferrari and Aston Martin.

However, this came at an inopportune time as the government mulled a levy of 20 per cent on luxury vehicles priced above 1.7 million yuan (HK$2.1 million) after import tax.

Harmony Auto said in its listing prospectus the impact should be small as such cars made up less than 5 per cent of its revenue. But Donny Wong, an executive director of Guotai Junan International who manages listing projects, said such news would affect investor sentiment.

"Car dealer stocks are not exactly in the spotlight now and investors are more interested in shares related to environmental protection and domestic consumption," Wong said.

Mando China Holdings, the first South Korean car parts maker to seek a listing in Hong Kong, called off its HK$2.09 billion offering last Friday citing "adverse market conditions" and "significant market volatility".

John Lu, an analyst at Guosen Securities, said the group's offering came at the wrong time as demand for car-related shares was weak. "Yongda Auto just offered HK$500 million worth of old shares last week, and I don't see this company as particularly attractive," he said.

While the net profit of Harmony Auto jumped 59 per cent to 350.7 million yuan last year, the gain was largely built on a rapid expansion of its network. Its number of outlets rose to 25 from just six in 2010, and 20 more are in the pipeline. The rapid expansion raised its bank loans 1.4 times to 2.07 billion yuan last year, while the company's gearing ratio rose to 84.3 per cent from 66.3 per cent a year ago.

There were other concerns behind the fast expansion. While the company said its inventories were more than double last year in response to growing market demand, the stocks' turnover period also increased from 34 days in 2011 to 38 days last year.

According to Harmony Auto, the increase was partly due to requests from European manufacturers for mainland dealers to take some of their unsold stock amid the stale consumer market there. The increased supply, coupled with reduced pricing, squeezed the firm's gross profit margin by 2.1 percentage points to 11.7 per cent last year.

According to the prospectus, among the 24 outlets leased by the company, 12 are subjected to certain title defects. If the company is evicted, relocation of the 12 shops would cost it up to 174 million yuan in expenses. The shops accounted for 3.09 billion yuan or more than half of the group's revenue last year.

While the Henan-based company has a fairly big retail network, most of them are in the province. It has only recently expanded into major cities such as Beijing and Shanghai where it says it faces fierce competition from dealers in those cities.

Harmony Auto, which began its roadshow on Tuesday, plans to start its public offering tomorrow - the same day as mainland real estate developer Wuzhou International Holdings.

Harmony Auto will issue 275 million shares at a price range between HK$6.08 and HK$8.88. Its cornerstone investor is Anhui Investment Group Holdings.

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