Shanghai $10,000 License Plates Drive Car-Hire Company Financing

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After adding the more than $10,000 for a car license plate in Shanghai onto the cost of maintenance, parking and insurance, Debby Yin decided to rent.

“The cost of a car number plate is scary and Shanghai’s taxi drivers are crazy,” said Yin, who’s been living in the city for a year. “Renting a Polo or Skoda is less than 100 yuan a day. I can drive anywhere I want and it’s safe.”

Automobile hire in China is big business and investors are keen to finance its growth. Car Inc., ranked No. 1, raised $300 million selling bonds this week, after attracting orders for 10 times that amount, while eHi Car Services Ltd. was marketing notes before opting not to proceed. Roland Berger Strategy Consultants forecasts the industry, worth about $4.3 billion in 2013, will grow more than 20 percent a year through 2018.

“Car rental in China is a hot spot enjoying exponential growth,” Vicki Shen, an associate director at Fitch Ratings Ltd. in Hong Kong, said. “The sector has huge potential as people gradually accept the car rental idea.”

Vehicle sales in the world’s biggest market are forecast by an industry association to slow to the least since 2011 this year, after a stock-market rout dented consumer sentiment.

Costly Plates

As regulators introduce tougher controls to prevent gridlock on roads and improve air quality, more Chinese are embracing the concept of renting. The cheapest number plate on the Shanghai government’s online plate bidding platform Alltobid.com was 83,100 yuan ($13,380) in July, more than buying a sports utility vehicle from BYD Co. outright.

Car Inc.’s 6 percent notes due 2021, sold at 98.851 cents on the dollar, are trading at 99.689, prices compiled by Bloomberg show. The Beijing-based company also raised $500 million selling 6.125 percent 2020 debentures in January in its debut offering. Issued at 98.944, they’re now at 101.590.

Chinese company dollar bond yields average 5.21 percent, down from 5.45 percent at the start of the year, JPMorgan Chase & Co. indexes show.

China’s second-largest car rental company, eHi, postponed its sale due to market conditions. Proceeds were to have been used for fleet expansion. eHi had some 24,360 vehicles on its books and a presence in 104 cities as of March.

China’s car hire market remains fragmented and companies also face competition from taxi-like booking applications such as Uber China and Didi Kuaidi Joint Co. The fight for market share could lead existing players to take on more debt and that, combined with the large amounts of capital expenditure required, concerns some overseas investors.

Price Sensitive

“The flipside of the high growth is high capex and competition, and uncertainty in regulations,” said Daniel Chan, a Hong Kong-based money manager at Rays Capital Partners Ltd., which has about $1 billion in assets. “Consumers in China seem very price sensitive, so they tend to go to a competitor if they see better discount.”

Most of Car Inc.’s bond proceeds will be spent on its fast growing chauffeured car service business, according to Wilson Li, the company’s chief financial officer.

“We started a mobile-enabled chauffeured car service with Ucar at the start of this year,” Li said. “Ucar is the nation’s third-biggest platform for mobile-enabled chauffeured car services, after Didi and Uber. The business is our biggest driver of capital expenditure this year.”

That’s good news for people like Gloria Gao, who’s been trying to get a number plate in Beijing for more than two years. While she waits, she’s using the Didi app.

“The car’s not as fancy as a Mercedes-Benz, it’s usually a Hyundai or a Citroen, but I don’t need to worry about the plate, the parking and all those costs,” she said. “You can even get a mobile phone charger.”

Strong Shareholders

Both Car Inc. and eHi have the backing of strong shareholders, which brings comfort to investors. The former counts Legend Holdings Corp. and Hertz Global Holdings Inc. among its largest equity holders. eHi enjoys the support of Chinese online travel booking site Ctrip.com International Ltd.

The size of China’s car rental market almost tripled to 27 billion yuan from 2009 to 2013 and is expected to reach 51 billion yuan by 2017, data from Frost & Sullivan Inc. show. Fitch Ratings expects eHi to double its fleet size to 39,000 vehicles this year. Car Inc. has a fleet of about 69,000.

“Size matters in this industry,” Fitch Ratings’ Shen said. “That’s why some companies are raising funds offshore, plus offshore bonds can also offer a longer tenor.”

— With assistance by Lianting Tu, and Judy Chen

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