Car-rental firm revs up Wall Street

After Ray Zhang rang the opening bell of New York Stock Exchange with a confident smile, the stock of the company he founded, eHi Car Services, China's second-largest car-rental company by revenue, picked up slightly after initially declining.

EHi fell 2.5 percent on Tuesday when the stock started trading and went up 0.85 percent at the close of trading on Wednesday, although the share price declined to $11.80 from $12.

EHi, founded in 2006, operates in 90 cities in China with a fleet of over 18,000 vehicles. On Nov 14, it postponed its IPO hours before its scheduled listing, due to fraud allegations in its financial filing. The allegation was later dismissed as baseless by third-party investigators employed by the company.

The IPO "is an important milestone in eHi's history" and "will boost our efforts to grow our business," Zhan said in a statement. The company declined a request for further comment.

EHi's IPO raised about $120 million. More than 80 percent of the net proceeds will go to expanding the company's vehicle fleet and service network.

"It's a capital-intensive business," said Zhu Zhengyu, an analyst from consultancy Analysys International, because car-rental companies need to invest heavily into fleet maintenance and hiring skilled workers.

In the five years through 2019, revenue for the car-rental industry in China will reach $13.6 billion, increasing at an annualized rate of 17.1 percent, according to a report published in August by consultancy IBIS World.

It said the growth will be fueled by income increases, development of tourism, lifestyle pursuits and local governments' restrictions on car purchases.

In April 2013, the US car-rental giant Hertz swapped its Chinese operation for a 20-percent stake and a board member position in Car Inc, which was founded in 2007 and is now China's largest car-rental company by revenue.

"As demands surge, the competition among car-rental companies is only going to be more fierce," said Zhu. Compared with the United States, where the biggest three players control over 90 percent of the market, the top three in China only controlled 10.7 percent of the total market in 2013, according to market research company Frost and Sullivan.

"The consolidation of the industry is expected to intensify in the next five years," said IBIS World in its report. After its September IPO in Hong Kong, which raised over $500 million, Car Inc started a price war by cutting its fees by more than 40 percent in some regions. "Market share is more important than anything else," said Charles Lu, CEO of Car Inc.

Car Inc controlled 7.3 percent of the market in 2013, while eHi had only 2.1 percent, according to Frost and Sullivan. Car Inc also had more than three times as many vehicles as eHi and nearly five times eHi's revenue by the end of June 2014, according to the two companies' financial reports. Data from Analysys International also showed Car Inc had twice as many active users in the first six months of 2014, and while Car Inc had a net profit of more than $35.6 million, eHi lost $3.4 million.

"We are concerned the firm is losing money, and suggest investors remain cautious," wrote Don Dion, owner and chief investment officer of DRD Investments on the financial forum SeekingAlpha.com.

So far this year, 14 Chinese companies have listed on US stock exchanges; 10 of them are technology companies. Nine of the 14 were listed on Nasdaq and five on the NYSE.

Lu Huiquan contributed to this story.