China ZhengTong Auto buys rival dealer for $860 million

31 August 2011   FinanceAsia

Nick Ferguson

Hubei-based China ZhengTong Auto Services, the second-biggest BMW dealership on the mainland, is set to pay Rmb5.5 billion ($860 million) for Exactwin, a rival dealer that specialises in selling cars made by Jaguar, Land Rover and Volvo.
The company’s shares were suspended from trading in Hong Kong on August 23, pending an announcement, and resumed yesterday after the company revealed its conditional agreement with Exactwin to buy its entire issued share capital.
Exactwin has automobile dealership outlets spread over Beijing, Tianjin, Fujian, Hunan, Guangdong and Hainan. In total, it operates 31 dealerships authorised by manufacturers, with an average contractual agreement that ranges from one to three years.
“The group is always committed to enhancing the sales of premium vehicle brands, and the acquisition constitutes part of the strategic investments of the group proposed during its listing exercise,” said Wang Kunpeng, chief executive officer of ZhengTong Auto, in the announcement. “Completion of the acquisition will significantly expand the group's network for dealing in premium vehicle brands, contribute to the group's effort to become a core dealer in premium branded vehicles in China and consolidate the group's leadership in the premium vehicle dealership sector in the PRC.”
Wang added that Exactwin’s dealership network will complement ZhengTong's existing network and help to strengthen the business. “We'll spare no effort to maintain our rapid growth as well as our leading position in China's automobile market, trying our best to maximise return for the shareholders.”
ZhengTong listed in Hong Kong in December 2010, when it reportedly secured initial investment from a fund managed by George Soros’s son as well as sovereign wealth funds from both China and Singapore. The company sold its IPO shares at HK$7.30 each and they peaked at more than HK$11 in late July, shortly before the trading suspension.
The company is controlled by billionaire Wang Muqing through Joy Capital, which owned almost three-quarters of the company after its IPO. However, Joy Capital reduced its stake earlier this month, from 72.7% down to 61.54%, prompting a brief sell-off in the company’s shares that has largely been reversed since the resumption of trading.
ZhengTong joined the Hang Seng Composite Index in March this year.
Like other premium car dealers in China, ZhengTong describes itself as a “4S dealership” group — with “4S” apparently standing for “sale, spare parts, service and survey”. The firm focuses on brands such as BMW, Mini and Audi, although it also operates dealerships for luxury brands such as Porsche and middle-market brands such as Nissan and Honda.
In total, the company operates nearly 30 dealerships and one urban exhibition hall, covering both the large, established automobile markets of the affluent regions of China as well as the rapidly developing regions.
At the time of its IPO, investors liked the fact that ZhengTong's business covers three areas with good growth potential: private consumption, which is something Beijing desperately wants to improve; the booming high-end car market; and the 4S shop business also fits with the service industry theme, which is another growth story in China, made attractive by growing household income and increased car ownership.