IPO Preview: China Auto Rental

| About: China Auto (CARH)

Based in Beijing, China, China Auto Rental (proposed CARH) scheduled a $126 million IPO with a market capitalization of $794 million at a price range mid-point of $11.50 for Wednesday, April 25, 2012. Each ADR represents 4 common shares. [S-1]

CARH is one of eight IPOs are scheduled for the week of April 23th. (Full IPO calendar here).

Manager, Joint Managers: Morgan Stanley; J.P. Morgan; BofA.

CARH is the largest car rental company in China. CARH says it has a clear leadership position across substantially all major operating metrics including fleet size, network coverage and number of customers. See chart of the top 10 car rental companies as of December 31, 2011 in China here. S-1, page 87.

CARH was profitable in the March 2012 quarter, with the first profit in its history even though it occurred in a seasonally high quarter.

CARH's utilization rate in the March quarter was 57%. Dollar Thrifty's (NYSE:DTG) utilization rate is 81%, so if CARH can increase it's utilization rate it's highly likely they will be profitable in the future as well.

In 2010 the China auto rental market was only 12% of the US market. See chart here.

CARH's auditor seems creditable, Ernst & Young Hua Ming.

CARH has the typical convoluted organizational structure of China-based companies that want to IPO in the US. See chart here.

There is a lot of negative sentiment regarding China-based IPOs in the US right now. Therefore, it seems prudent to avoid on the CARH on the IPO, but look for buying opportunities on a possible drop in the after market. See 'growth drivers' below.

CARH's price-to-ebitda was 18 for the 12 months ended December, 2011. Annualizing the March quarter results, however, the price-to-ebitda drops to 6.4 from 18 for calendar 2011. CARH's financial metrics are going in the right direction.

Some valuation metrics.





March '12 qtr

Cap (MM)

% of Rev


Fleet utilization rate

China Auto Rental (CARH)




calendar 2011
China Auto Rental





Hertz (NYSE:HTZ)




Dollar Thrifty





Avis Budget Group (NASDAQ:CAR)




CARH is the largest car rental company in China. CARH says it has a clear leadership position across substantially all major operating metrics including fleet size, network coverage and number of customers.

Also, CARH further notes that is has the largest market share in terms of revenue in China's car rental market, according to Roland Berger.


CARH's network of 520 service locations covers 66 cities in all provinces and provincial-level municipalities of China, with 24/7 service at 52 major airports in China and in every city where CARH operates.

China's car rental industry is at an early stage of development and has experienced substantial growth in recent years. Compared to more mature car rental markets such as the United States, Canada, Japan and France, China's car rental market is underpenetrated and highly fragmented.

Market Size & Growth
According to Roland Berger, total revenues in the China ("PRC") car rental industry grew from RMB5 billion in 2005 to RMB17 billion ($2.5 billion) in 2010, representing a CAGR of 27%.

The car rental market is expected to further increase to RMB39 billion ($6.1 billion) in 2015, representing a CAGR of 18% from 2010 to 2015.

Penetration rate
In 2010 the car rental penetration rate in China was 0.4%, compared to 1.3% in the United States, 0.8% in Canada, 2.2% in Japan, and 0.7% in France, according to Roland Berger.

Market fragmentation
As of December 31, 2010, there were over 10,000 car rental companies in China with an average fleet size of no more than 50 vehicles, according to Roland Berger.

Rental use
A majority of car rentals in China is for business use, while leisure use and replacement rentals constitute a smaller yet growing percentage of the total market, according to Roland Berger.

In 2010, business use rentals, leisure use rentals and insurance replacement rentals constituted 80%, 18% and 2% of China's car rental market, respectively, according to Roland Berger.

Sustained disparity
The number of licensed drivers in China as a percentage of the total population was 12% as of December 31, 2010, compared to 69% in the United States as of the same date, according to Roland Berger.

China had 151.3 million licensed drivers and 61.2 million passenger vehicles as of December 31, 2010, according to the NBSC.

Limiting car ownership
There are more than 2 million government-owned cars in China, according to Roland Berger. The Chinese government has recently implemented a series of policy reforms to limit the number and models of cars that may be purchased by government agencies and encourage government agencies to meet their needs for car use by resorting to commercial vehicles.

CARH's business generally experiences some effects of seasonal variations due to customer demand or increases in travel during certain time of the year such as Labor Day, National Day and Chinese Lunar New Year holidays. During these times, our rate of reservations and the revenues generated are generally higher than the rest of the year.

Car rental companies in China include privately-owned domestic car rental companies, such as us, eHi, and Topone, the local branches of international car rental companies such as Avis and Hertz, and affiliates of state-owned automobile manufacturers in China such as Shouqi and Dazhong.


CARH expects to net $112 million from its IPO. $90 million of the proceeds are for vehicle acquisition to further expand the rental fleet. The balance is for general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This CARH IPO report is based on a reading and analysis of CARH's S-1 filing, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.