Three years. That figure has suddenly become the magic number for a growing number of private Chinese firms that are increasingly looking to make IPOs in Hong Kong, which requires that all companies show at least 3 consecutive years of profit before they can list there. That magic number appears to be the key element behind new remarks by leading car rental firm China Auto Rental, which says it favors a Hong Kong listing within the next 3 years over New York. Not surprisingly, the company’s chief executive Charles Lu said he expects China Auto to turn profitable this year, meaning 2016 is the earliest his company could qualify for a listing on Hong Kong’s main stock exchange.
China company watchers may recall seeing China Auto’s name in the headlines before, partly because it represents a huge growth area but more likely because it was involved in an aborted IPO in New York last year. The company’s new interest in moving its listing to Hong Kong is part of a broader trend by similar privately-funded Chinese start-ups, who say that investors based in nearby Hong Kong understand their companies better than those in distant New York or London.
But the 3 year profitability rule is a major obstacle, since many of these start-ups that would like to list are either losing money or have just turned profitable recently. Unlike Hong Kong, the 2 major stock exchanges in New York have no such requirements that companies be profitable before they can list. Many may recall that the lack of such a rule allowed a flood of money-losing companies to raise billions of dollars in US IPOs in the late 1990s, resulting in a massive Internet bubble that ultimately burst.
So let’s take a closer look at China Auto, which operates the zuche.com website and whose name has become synonymous with auto rentals in China. Lu says in an interview he prefers a Hong Kong IPO to New York because local investors are more familiar with his company. (English article) He added China Auto plans to double its fleet to around 100,000 cars from the current 55,000 over the next 3 years, and that its revenue will grow more than 50 percent this year to 2.5 billion yuan ($400 million) as it posts its first-ever profits.
Unfortunately for China Auto, the company will have to carry out its major expansion without any funds from capital markets. The company made headlines last year when it became the first Chinese firm to apply for an IPO in 2012, with a plan to raise up to $300 million in New York. But dismal investment sentiment at that time forced China Auto to abort the deal in May last year. (previous post)
If I was an investor, I would have purchased some shares in the company as I do think there’s huge growth potential in the China rental car market. Sensing that potential, US auto rental giant Hertz made a major investment in China Auto in April this year, purchasing 20 percent of the company for an undisclosed price. (previous post) I suspect Hertz probably paid as much as $200 million for the stake, which China Auto is now using to fuel its current expansion.
China Auto certainly isn’t the first company to take a serious look at Hong Kong as an alternative to New York. Online game company Suzhou Snail is reportedly considering a similar listing, and earlier reports indicated that export software maker Skysoft and specialty e-commerce site Cogobuy were aiming to list in Hong Kong as well. (previous post) If I were the Hong Kong stock exchange, I would seriously consider scrapping the 3 year profit rule to make it easier for more of these Chinese start-ups to list in the city. But at the end of the day, many Chinese companies may still prefer Hong Kong because of its closeness to China, assuming they can wait long enough to show 3 years of profits.
Bottom line: China Auto is likely to list in Hong Kong if it has the money and patience to wait until 2016 when it will meet profit requirements for a local IPO.
This article was first published in the online edition of the South China Morning Post at www.scmp.com.