Auto Industry

Taking instructions

An IPO for China’s first driving school, and the long road to regulatory reform

Driving w

Learning process

Possessing a driver’s licence hasn’t always meant that you’ve passed a driving test. In Britain, car owners have been required to hold permits since 1903. But the qualifications were only that holders were at least 17 years of age and had five shillings in change. There was no formal test procedure until 1934.

With self-driving cars only just over the horizon, driving licences might become a thing of the past. But before we all start dialling up our rides home, Eastern Pioneer Driving School is making the most of China’s car ownership boom, becoming the first driving school to launch an IPO.

Global Times reports that the firm is shrugging off the threat from driverless vehicles (internet giant Baidu is currently roadtesting such vehicles, having got permission from cities). The school assures investors that the automation trend will “not have a material impact on its business”. Eastern Pioneer already controls a quarter of Beijing’s market for driving lessons, instructing more than a quarter of a million students in 2014, the Economic Observer has reported.

Despite this impressive market share, profit growth has decelerated. Net income rose 24.5% year-on-year in 2014, down from the 38.7% growth in the previous year, although the stronger performance in 2013 was helped by regulations requiring applicants to sit at least one month of lessons before taking their tests. Certainly the local investor community seemed to view the school’s story as a strong one: after listing its market value reached a heady Rmb16 billion ($2.48 billion).

Eastern Pioneer’s Rmb850 million IPO was also notable for being one of the first of seven companies to go public under a set of new rules issued by the China Security Regulatory Commission (CSRC). According to the revised rules (announced in January, see WiC303) investors pay for shares only once they have been allocated to them, preventing the freezing of large amounts of cash that resulted from the previous practice of upfront payment.

FinanceAsia explains: “Under the new IPO rules, retail and institutional investors can pay for the exact value of new shares after they secure them. Previously they were required to deploy much more capital for pre-ordering new shares that they might not get”.

The latest regulations are designed to stop IPOs from chewing up market liquidity. The proviso is also tipped as an important step in the lengthy process of transforming the approval-based process into more of a market-based registration system in which the timing and supply of new listings is left to companies and investors, rather than the regulators.

The plans for a new registration system were approved last December and given a deadline of two years for full implementation, Bloomberg reports. The news agency believes that the change in approach will be welcomed by many of the 700 companies awaiting IPO approval – but might be viewed more cautiously by investors, who worry that the reduction of CSRC oversight will reduce the appeal of IPOs, which are generally seen to “offer safe havens from the bear market in equities”.

So far the changes have done little to dampen investor enthusiasm for new market listings. In fact, shares in the six companies that priced their IPOs in the last two weeks of January were oversubscribed by more than 1,800 times on average.

Investors have been desperate to get a slice of the action, because regulators have capped the price-to-earnings ratio an IPO can be priced at using a level less than half the median valuation on China’s stock exchanges. Market regulators say the cap is designed to protect retail investors. For the lucky few that get an allocation, it means the likelihood of the stock going up is strong. In that respect it is yet another instance in which the CSRC continues to distort the IPO market, albeit with the intention that ordinary investors don’t get fleeced.

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