Dongfeng courts pre-IPO investors
Group sits down with Temasek, UK and local investors before global sales trip
China's third-largest automaker Dongfeng Motor Group is in negotiations to have Singapore's state investment vehicle Temasek Holdings and two other companies as strategic investors, as part of an almost US$600 million initial public offering in Hong Kong, sources said.
The potential investors, including a Hong Kong-based company and a British-based company, intend to take up to 15 per cent of the offering but sources close to the deal said the amount had not been finalised.
The car maker started marketing its offer on Monday and is set to begin an international marketing roadshow in the week beginning November 7.
Sources said the retail tranche of the float was tentatively scheduled for between November 17 and 22, while the market debut was expected late next month at the earliest.
The Hubei province-based carmaker is expected to sell about 2.5 billion shares, or 30 per cent of the offer, to the public and could sell an additional 372 million shares to satisfy extra demand, sources said.
Fund managers said Dongfeng was testing the waters with a valuation of 9 to 10 times this year's forecast earnings, higher than its rival Denway Motors' 8.79 times.
They said Dongfeng's sponsors argued the company warrants a higher valuation due to its diversified operations and brands but some fund managers baulked.
'Given the fierce competition in the mainland car industry, it's difficult for Dongfeng to justify its higher-than-peer valuation. We can easily buy something cheaper in the market amid the recent sharp corrections,' a fund manager said.
Others worried about industry fundamentals.
'While the industry's sales growth will pick up, rapid capacity expansion will keep utilisation rate low and price competition will weigh on profit margins,' said ABN Amro Asset Management fund manager Mary Chan. 'Attractiveness of companies will depend on how well they manage costs through component localisation.'
The deal's co-sponsors China International Capital Corp (CICC), Merrill Lynch and Deutsche Bank and co-managers Morgan Stanley and Daiwa Securities estimated Dongfeng would see a 39.3 per cent fall in net profit this year to an average of about 1.57 billion yuan.
But they provided different pro-forma profits for last year to adjust for effects of the company's restructuring. Pro-forma figures aim for apples-to-apples comparisons.
The different figures saw Merrill Lynch projecting a 15 per cent pro-forma net profit rise for this year, CICC a 23 per cent increase, Daiwa a 9.33 per cent fall and Morgan Stanley a 9.7 per cent decline.
CICC expected a 17 per cent dividend payout ratio next year.
The underwriters said Dongfeng would pay 1.5 billion yuan of dividend declared on June 30 to its parent. This is similar to the forecast profit for this year. Dongfeng Motor Group includes its parent Dongfeng Motor Corp's 50-50 joint ventures with Japan's Nissan and Honda and France's Peugeot Citroen. A 25 per cent stake in a separate joint venture with South Korea's Kia and Jiangsu Yueda Investment was excluded.
To boost profitability, Merrill Lynch expects Dongfeng's joint ventures to introduce six new models next year and invest 13.4 billion yuan in eight production expansion projects from 2005 to 2008.
