What's new
Zhengtong announced a plan to place 500mn shares （around 2.21%of its post-deal total） to no less than six investors （including PICCand funds managed by PICC AM） at a price of HK$7.60/sh.Zhengtong’s stock will resume trading on December 18.
Comments
PICC partnership to boost auto finance business. The shareplacement could raise around HK$380mn, while the net proceeds（excluding fees） could reach around HK$377mn. Zhengtong will usethe proceeds to support the development of its fin-tech platform.
Moreover, PICC could provide funding support to Zhengtong after itbecomes a shareholder. To expand its presence in the auto financemarket, Zhengtong established Dongzheng AFC and a joint venturewith Xiamen International Financial Technology. Zhengtong alsopartnered with automakers and financial institutions to furtherexpand its business portfolio.
Size of auto finance market to exceed Rmb2trn, driven by strongdemand. Young consumers that prefer to gradually pay forautomobiles in installments have become the major car buyers,boosting demand for auto finance services. Compared withdeveloped countries, China’s penetration rate of auto finance servicesremains low and may rise further in the future. We expect the size ofChina’s auto finance market to exceed Rmb2trn by 2020.
Policy support improved supply; new rule to further boost demand.
In 2004, the State Council announced a policy to encourage non-bankfinancial institutions to expand into the auto finance business, endingbanks’ dominance of the auto loan market. According to a new ruleset to take effect in 2018, down payments for alternative-fuel andused vehicles will be cut, which may further boost demand for autofinance services and the growth of auto-finance companies.
Valuation and recommendation
We keep our earnings forecasts unchanged. We maintain our BUYrating and target price of HK$13, implying 14x 2018e P/E.
Risks
Weaker demand due to monetary tightening.