Warburg Pincus in China car hire play

China Auto Rental responded to poor investor sentiment by scaling back its IPO from an original $300 million, but ended up pulling the plug in late May, fearing that a weak offering would impair future ability to raise funds.

Nevertheless, certain capital needs still had to be met - servicing the debts and financing the fleet expansion that was supposed to be covered by the public offering. Last week, Warburg Pincus invested $200 million in the company for a significant minority stake. It comes two years after Legend Holdings bought control of China Auto Rental for RMB1 billion ($156.6 million).

David Li, managing director of Warburg Pincus, tells AVCJ that his team had been tracking China Auto Rental for some years as it looked for ways to gain exposure to the country's broader auto market. "After this round of investment, the company will continue to increase its scale and optimize its services to better serve the growing demands of Chinese customers," Li says. "There is no plan for an IPO in the near future."

Warburg Pincus' capital and expertise will be used to help China Auto Rental consolidate an already strong market position. As of June 30, it had nearly 600 service locations covering 66 cities and 52 major airports. The company's fleet of 32,000 vehicles is equal to the aggregate fleet size of the next nine largest car rental players.

There are also strong fundamentals: robust economic growth, ongoing urbanization, rising disposable incomes and better roads. According to strategy consultancy Roland Berger, China's car rental industry grew fivefold to RMB17 billion between 2005 and 2010, while the penetration rate is 0.4% compared to 1.3% in the US. With the average car rental company fleet size no more than 50 vehicles, there are opportunities for consolidation.

"China's car rental industry is experiencing an explosive growth, reaching a market size of RMB20 billion with compound annual growth of over 20% in the next few years," Li observes.

At the same time, expansion involves significant upfront costs. China Auto Rental buys most of its vehicles, as opposed to leasing them, due to limited financing options. As a result, the company's capital needs are high. Although revenue has grown from RMB54 million in 2009 to RMB498.4 million for the first nine months of 2011, net losses rose from RMB3.2 million to RMB117.6 million.

The challenge is striking a balance between the need to control costs, improve services and maintain growth rates.

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• Topics
• Greater China
• Consumer
• automobiles
• Warburg Pincus Asia
• China
• Consumer