Chinese automobile dealer Zhongsheng Group Holdings Ltd yesterday started testing demand for a Hong Kong initial public offering (IPO) that could raise as much as $1 billion, said three people with knowledge of the planned sale.

The company, based in Dalian, Liaoning province, plans to start taking orders on March 3, said two of the people, who declined to be identified because the information is private. The share sale may fetch $600 million to $1 billion, the three people said.

Zhongsheng is coming to the market as investors have become more selective in buying shares in IPOs. Hong Kong's benchmark Hang Seng Index has fallen 7 percent this year. Four of the six companies that went public in the city in 2010 are trading below their IPO prices, according to data compiled by Bloomberg. China overtook the US last year as the world's largest automobile market with sales jumping 46 percent to 13.6 million, according to the China Association of Automobile Manufacturers.

"Almost all global carmakers have set up operations in China," said a BOC International Holdings Ltd (BOCI) report dated Feb 19, which predicted increasing competition would require automakers to improve their ability to retain customers and manage distribution networks.

"Dealers will play a critical role, as they handle the greater part of customer interactions," it added.

Zhongsheng operates 47 "4S" car dealership shops around China for mid-end to luxury brands including Mercedes-Benz, Lexus, Audi and Nissan, according to the BOCI report. "4S" means sales, spare parts, service and survey, said BOCI, which is arranging the share sale with Morgan Stanley and UBS AG.

Zhongsheng ranked as the fourth-largest Chinese auto dealer by revenue in 2008, with 1.2 percent of the domestic market, the report said. Its number of "4S" outlets more than tripled from 15 in early 2006, and they are concentrated in better-off northeastern, eastern and southern coastal cities.

BOCI said it expects the company to open 28 new dealerships this year and acquire 20 others.