China's third-largest car maker, Dongfeng Motor Group Ltd, is expected to raise as much as US$590 million through an initial public offering (IPO) in Hong Kong to repay its debts and develop new models.

It is the second listing attempt by the company, which delayed a listing last year. This current IPO is half the previous one's size.

Analysts said Dongfeng's IPO will have to face a sluggish stock market, where liquidity has been soaked up by several mega-IPOs. A number of other smaller IPOs are also competing for subscriptions with the auto maker.

The Hubei-based vehicle manufacturer is offering 2.438 billion H shares, with a share price range of between HK$1.45 (18.6 US cents) and HK$1.85 (23.7 US cents).

The auto maker, which plans to invest US$3.1 billion to increase output by 65 percent to 1.2 million vehicles by 2008, is scheduled to price the deal next Wednesday ahead of a trading debut on December 7.

The IPO will be open for individual investors in Hong Kong from today to next Tuesday.

Temasek Holdings, a Singapore government investment agency, and Standard Chartered's private equity fund have agreed to buy respectively US$40 million and US$50 million worth of shares, reports said.

Dongfeng's Executive Director and President Liu Zhangmin said the IPO's proceeds will be mainly used for debt reduction with four State-owned asset management firms, China Huarong, China Cinda, China Orient and China Great Wall.

He said in a statement that he is hoping the company's gearing ratio will remain at a normal level with international peers after going public.

Analysts are maintaining a wait-and-see attitude towards the car maker's IPO.

Overcapacity on the mainland, high fuel prices and a sluggish Hong Kong stock market are cited as three major challenges facing the auto maker.

"Retail investors in Hong Kong do not seem to have confidence in the mainland's automobile industry. Their enthusiasm has been cooled by the fluctuation of the mainland's passenger car prices. And uncertainties lie ahead in the industry," said a Hong Kong-based analyst, who spoke on condition of anonymity.

"The increasingly-high oil prices will also discourage many mainlanders from buying cars. All these factors will impair investors' confidence," he said, adding he himself would not consider buying the shares.

The book-runners for the offering, China International Capital Corp, Merrill Lynch and Deutsche Bank, expect Dongfeng's net earnings to grow 38 percent to 2.1 billion yuan (US$260 million) in 2006.

With factories in Wuhan and Xiangfan, two of the country's key industrial cities, Dongfeng produces passenger vehicles under 50-50 joint ventures with Japan's Nissan Motors, Honda Motors and French car maker Peugeot Citroen.

By the end of the last year, Dongfeng's total assets were 58.1 billion yuan (US$7 billion), with net assets standing at 21.7 billion yuan (US$2.6 billion). It employed a total of 117,000 people.

In the first eight months of this year, the company produced 329,000 vehicles, up 17 percent from a year earlier, and sold 321,000 units, up 19 percent. Its sales revenue for the eight months increased 18 percent to 52.1 billion yuan (US$6.3 billion) and profit jumped 28.4 percent to 4.6 billion yuan (US$554 million).

Dongfeng had 12 percent of the passenger-vehicle market on the mainland in the first half of this year, combining the unit sales from its Nissan, Peugeot Citroen and Honda joint ventures, according to the China Association of Automobile Manufacturers.

(China Daily November 24, 2005)