SGD New Issue Review : GITI 3Y 6.125%

NEW ISSUE: GITI TIRE PTE. LTD. SGD 3Y – INITIAL PRICE GUIDANCE

ISSUER: GITI Tire Pte. Ltd.
SERIES:   001
STATUS: Direct, unconditional, unsubordinated and unsecured Notes
RATING:  Unrated
FORMAT:  Reg S, S274 & 275 of SFA, issuance off S$750 Million Multicurrency Medium Term Note Programme
ISSUE SIZE:  TBD
TENOR:  3 years
ISSUE DATE:  [●] November 2014
MATURITY DATE: [●] November 2017
INITIAL PRICE GUIDANCE:  6.125% area
REDEMPTION UPON CHANGE OF CONTROL: 101%, in accordance with the Programme
REDEMPTION FOR TAXATION REASONS: Yes, in accordance with the Programme
PAYMENT:  Semi-annual, actual/365 (fixed)
DETAILS: SGD250K/ Multicurrency Medium Term Note Programme/Singapore Law/CDP
LISTING: SGX-ST

– New Giti Tire SGD 3yrs announced with strong IOIs received post SG roadshow
– Initial price guidance: 6.125% area
– Pb selling commission: 50cents
– Issue size: TBD
– Timing: This week’s business, as early as today

Comparables:

Tan Chong  International 2.8%  01/2017 at 100.60, 2.51%
Tata Motors 4.25%  05/2018 at 100.25, 4.17%
grand china air 6 2017 at 100.35, 5.88%

Credit Highlights:

– GITI Tire is one of the largest tire manufacturers and distributors in the PRC, as well as a major exporter of tires into the international market. The Group sells and distributes its products to replacement market customers and original equipment manufacturer customers in the PRC and over 100 countries globally, including America, Europe, Middle East, Africa and Asia Pacific.

– Leading tire manufacturer and supplier in the PRC. The Group had a market share of 14.4% and 6.4% of the total production volumes of passenger car radial tires (“PCR”) tires and truck and bus radial tire (“TBR”) tires, respectively in the PRC in 2013, making it the largest and fourth largest among the tire manufacturers respectively. The Group’s sale revenues in the PRC have achieved a compound annual growth rate of 20.0% for PCR tires and 18.8% for TBR tires from 2003 to 2013.

– One of the largest tire sales and distribution networks in the PRC, with expanding international sales and distribution capability.  The Group’s 64 provincial sales teams in the PRC are supported by 17 logistics centres and 10 regional operation centres across the PRC.  The Group’s broad distribution network connects its seven manufacturing plants, which are strategically located along key transportation routes in the PRC, to around 1,600 direct customers, who in turn distribute the Group’s products to approximately 20,000 points of sale nationwide within the PRC. In the export market, GITI Tire has received international endorsement of its brands and product quality, and it serves renowned global OEM customers such as GM, Renault and Fiat. The Group has also secured supply agreements with reputable partners such as the Bridgestone Group, Walmart and Discount Tire.

– Balanced product and market mix. The Group’s diverse product range allows it to temper the impact of demand downturns in any single product. The Group’s sale of PCR tires, TBR tires and bias tires represented 56%, 41% and 3% of the Group’s total sales for the year ended 31 December 2013. The Group also benefits from geographical diversity in its overall sales mix – sales to the domestic PRC market and the export market represented 56% and 44%, respectively, of the Group’s total sales for the year ended 31 December 2013.

– Comprehensive product portfolio with commitment to multi-brand strategy. The Group offered approximately 140 patterns of  PCR tires, 220 patterns of TBR tires and 70 patterns of bias tires in full sizes for all types of vehicles, ranging from sedans, multipurpose vehicles, small commercial vehicles, buses, light trucks and aircrafts and other industrial vehicles, comparable to any major global tire manufacturer.

– Competitive cost structure. The Group believes that its large-scale operations in the PRC enable it to benefit from significant economies of scale which in turn permit it to lower operating costs particularly in respect of costs associated with labour, raw materials and facilities.

– Well-developed research and development capabilities. The Group has four research and development centres in United States, Germany, United Kingdom and PRC. It has a team of more than 600 engineers which includes senior advisors who were senior technical staff at leading global tire manaufacturers. The Group uses a number of leading tire-industry technologies and also subjects its products to rigorous voluntary testing and certification as part of the research and development process. The Group has also entered into formal technology and research agreements with leading research institutes and organisations both in the PRC and internationally.

GITI owns 49.7% of Gajah Tunggal, the largest integrated tire manufacturer in Southeast Asia and B2/B+ rated.

Gajah Tunggal USD 7.75% 02/2018 is indicated at 99.50 7.92%.

Gajah Tunggal 7.75% 02/2018 Bond Price

Gajah Tunggal 7.75% 02/2018 Bond Price

 

Separately, GITI Tire Ltd had an unrated  USD 200 mio bond that was called back at 103.06 on 09/2011. That bond paid a coupon of 12.25% for 5 years.

An infrequent borrower, they are looking to expand their global presence by investing $ 560 mio in a South Carolina manufacturing plant. http://sccommerce.com/news/press-releases/giti-tire-establish-chester-county-manufacturing-plant-create-1700-jobs

So, this is another Indonesian family bond, tracing the ownership roots to the Tuan Sing family. Thus it is reasonable to expect Singapore banks will be fighting for their business.

As a small player in the tyre business, I do not have a strong view on their continued profitability as we should expect some industry consolidation in the months and years ahead.

The Offering Memo did list out some risks to their business which includes, 1. US anti dumping tariffs in the past and potentially in 2015

$2 Billion in Chinese Tires Again Face Specter of U.S.
Oct 16, 2014
China-manufactured car and truck tires may again  face U.S. anti-dumping and anti-subsidy tariffs in 2015, three years after U.S. punitive tariffs on the same tire imports expired. The United Steelworkers union petitioned the U.S. to levy tariffs of as high as 88% to offset price advantages on tire imports worth $2 billion in 2013. The U.S. is expected to announce the results of its illegal subsidy probe in November and its dumping investigation in January.

2. European products standards
3. Indonesia investigation on alleged price fixing activities that commenced in Oct 2014 against Gajah Tunggal.

And given that Gajah Tunggal is an integral part of the group’s finances, I would not price the bond any less than a token discount to Gajah Tunggal’s yield.

On the contrary, the group’s GITI Tire A shares are trading at a historic high.

GITI TIRES A SHARES

GITI TIRES A SHARES

 

I cannot say I prefer this bond over Grand China Air although it looks better than the recent Swiber and Tee Land. And 6% does not do justice to the risks.

I never liked tires much and if anyone remembers the Bridgestone/Firestone scandal in the 80’s that rocked the markets.

Today we have Takata Corp, a Japanese air bag maker, under US criminal investigation. http://www.bloomberg.com/news/2014-11-10/takata-falls-after-u-s-senators-call-for-criminal-probe.html

Then again, being based in China has its advantages too.

Good luck !