BYD’s bumpy road to Chinese IPO

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from Reuters:

Warren Buffett-backed BYD Co Ltd faces stiff headwinds raising the $330 million it seeks from its China share sale, with weakened markets and the battery and electric vehicle company’s recent poor performance scaring off investors.

Some nine fund managers and industry analysts surveyed by Reuters said they would want to see BYD’s Shenzhen share offer priced at a discount to its Hong Kong-listed shares before they would considering subscribing.

“It’s going to be very difficult for them to get the price they want,” said Pan Jiang, a Shanghai-based fund manager at Franklin Templeton Sealand Fund Management.

“Stock market sentiment is very weak right now, and we’re not looking at this share because we are not too positive on industries such as electric vehicles.”

China’s benchmark Shanghai Composite Index is hovering around its lowest levels this year, battered by fears of a possible economic slowdown in the latter part of 2011 as bank lending slows.

In line with Chinese IPO practice, the company and its underwriter UBS Securities, the Swiss bank’s joint venture in China, have not set a price range for the Shenzhen share sale and are currently on the road seeking feedback on a price investors are willing to pay.

 

BYD said in its prospectus it hopes to raise 2.16 billion yuan ($333 million) from the sale of up to 79 million shares. That works out to an offer price of over 27 yuan per share — a hefty 45 percent premium over its Hong Kong close on Monday.

Some institutional investors have balked at the asking price, pointing to the firm’s sluggish sales in recent months and the potential downside risk in BYD’s foray into electric vehicles and car batteries.

“Earnings from electric cars and buses will take some time to realise,” said Victoria Mio, who manages about 600 million euros at the Robeco Chinese Equities Fund. “The automobile sector is especially weak now, and there is still some downside risk.”

BYD plans to use the stock proceeds to fund its lithium ion project, add to research and development and expand its product range.

The company has seen its auto sales fallen steadily since the second half of 2010. Its May sales slid 9 percent to about 41,000 cars.

Its shares have also been in downward spiral, with its Hong Kong-listed stock tumbling more than 60 percent in the past year, compared with a more than 8 percent gain in the benchmark Hang Seng Index .

BYD’s performance is also weaker than other Chinese carmakers listed in Hong Kong. For example, Great Wall Motor has risen about 95 percent in the past year.

BYD last traded at HK$23.20 on Tuesday, up 3.1 percent on the day.

 

HEFTY VALUATION

BYD’s Hong Kong-listed shares, which were trading at over 17 times historical earnings on Monday, are still priced at a significant premium to its peers on the mainland which typically trade at below 10 times earnings.

For example, top Chinese automaker SAIC Motor Corp closed at about 9.5 times earnings on Monday, while Great Wall Motor closed at about 8.5 times earnings on the same day.

“The Chinese auto market is very different now from 2009 or 2010 when sales kept hitting new records,” said Liu Lixi, an analyst with Northeast Securities.

Shares of Pangda Automobile Trade , one of the country’s top auto dealers, plunged 23 percent on its Shanghai debut in late April on concerns of slowing auto sales and stock market volatility.

To avoid falling below its IPO price on its opening day like Pangda Auto, BYD should set its price at between 15-25 yuan, many of those polled said, pointing to total proceeds of 1.2-2 billion yuan.

“It’s obviously not a good time to go public now unless a company needs money urgently, and BYD seems to fit into that category,” said Liu at Northeast Securities.

Despite all the seeming pessimism, BYD, which stands for “Build Your Dreams”, still has its Buffett trump card that has said it is ready to stand by one of its most prolific Chinese investments.

Buffett’s Berkshire Hathaway (BRKa.N) is happy with its investment in BYD and still considers the company a good investment despite the company’s recent problems.

It owns about 10 percent of the Chinese carmaker, which it bought in September 2008 for $230 million, or about HK$8 per share.

“I’m quite encouraged by what’s going on, and I expect delays and glitches,” Berkshire’s Vice Chairman Charlie Munger said in late April, adding that such growing pains were natural given BYD’s aggressive growth plan