Timing of an automotive IPO critical even in China
For the record, Dow Jones Newswires reported the cancellation of the China Yongda Automobiles Services Holdings Ltd. IPO earlier today.
In case you have not heard of China Yongda Automobiles Services Holdings Ltd., the company retails passenger vehicles, including new and used vehicles, plus it offers automobile rentals. China Yongda Automobiles also provides service to the brands that it sells. Brands include BMW, General Motors’ Buick, and operates 66 stores selling these mid-to-high-end vehicles. For example, GM manufacturing in China still requires dealer networks, not less than it does in America.
So, it should be no surprise that such a large distributor would want to take advantage of an IPO (initial public offering) to raise additional funds to expand and run its business. After all, the Chinese auto market is destined to become the largest in the world, surpassing even America.
Bloomberg’s latest report, though, says the company canceled plans to raise as much as $430 million in an initial public offering in Hong Kong; the source being two people with knowledge of the matter.
Of course, this was not good news for those who benefit from an IPO, the companies that handle the public offering. In this case it was arranged by UBS AG and HSBC Holdings Plc.
Looking deeper, one has to wonder what the real reason was. According to the Bloomberg report based on its own resources, there was not enough demand from investors.
Actually, that's a darned good reason not to go forward with an IPO. A rash decision now could hurt further offerings in the future, especially if investors get hosed a few days after IPO day.
Point is, even hype and demand may not be enough, especially after the hype dies down. Consider the recent IPO for Facebook. Even with its heavy hype and demand, its stock traded initially at 38, but now at 31.34. One article I read from an analyst on MarketWatch has FB targeted for a value of 13.80, still a far cry lower than it is now.
So, perhaps this cancellation by Yangda is merely a reflection of market action, not necessarily a negative on the company being offered. Truth is, with every IPO there is no technical analysis available to project price. All investors have to go on are the fundamentals and the perception of the fundamentals. If that perception is even one bit negative, it can sway the demand factor tremendously.
Consider, too, the Bloomberg report indicated that other dealer groups have been burning cash to expand; and that is the likely concern. Well, every IPO has that issue. Question is, will the cash burn and expansion result in increased sales and profits? If investors cannot see those elements in the near future, then initial demand will wane. And if the company did go public, the traders may likely wait until price meets their sense of value, whether valid or not.
Keep in mind, though, this is a dealer network, not a manufacturer.
In addition, Hong Kong’s benchmark Hang Seng Index (HSI) has not exactly held up either. It is down 11 percent this month alone on signs that China’s economic slowdown is deepening. Furthermore, we cannot discount the effect that Europe’s debt crisis may have on the world's economic condition, especially if it worsens.