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BIZCHINA / News
SAIC's recent tie-Up may trigger some growing pains
(The Wall Street Journal)
Updated: 2007-08-02 15:26
In the eyes of many investors, bigger is better for Shanghai Automotive
Industry Corp - but there's no guarantee a greater size would smooth the
road for China's leading car maker.
Shares of SAIC's listed unit, Shanghai Automotive, have been surging for
months, in part on speculation of a merger with smaller rival Nanjing
Automobile (Group). In the first four weeks of July alone, Shanghai
Auto's share price climbed 38%.
Then, during the past weekend, SAIC said it signed a letter of intent
with the parent of Nanjing Auto for "full cooperation." Details haven't
been provided, and it's unclear whether cooperation will entail the
full-fledged merger on which synergy-minded investors have bet.
In the first two days after the weekend announcement, shares of Shanghai
Auto -- which trade only in Shanghai -- stayed high. Yesterday, as all
Asian markets fell, Shanghai Auto's share price dropped 4.2% to 22.89
yuan ($3.02). The Shanghai composite index lost 3.8%.
Merger speculation wasn't the only factor fueling gains for Shanghai
Auto, as it has reported sharply higher earnings and many analysts like
its outlook. Even with yesterday's drop, the share price is more than
four times higher than a year ago.
The recent ascent in Shanghai Auto shares makes some analysts wary.
"Probably the mainland investors got too excited about the acquisition --
the bigger the better, that kind of mindset," says Lehman Brothers
analyst Yankun Hou. A full-scale tie-up between the two groups could be a
drag on Shanghai Auto, at least in the short term, says Mr. Hou, noting
Nanjing Auto has posted operational losses in recent years. And in big
mergers, there's no guarantee the execution intended to knit the two
together will be smooth or successful in the long term, he says.
Shanghai Auto already faces challenges. Its income depends heavily on the
performance of its joint ventures with General Motors and Volkswagen.
Goldman Sachs warns that sales-volume growth at those ventures could
weaken "as core models become increasingly obsolete." Goldman also says
competition in China's full-size car market, pivotal for Shanghai Auto,
could intensify.
Goldman initiated coverage on Shanghai Auto in early June with a "sell"
recommendation and a 12-month target price of 11 yuan, below where the
shares were trading at the time. So far, Goldman hasn't altered its view
on the company.
Moves by SAIC and Nanjing Auto to find common ground fit with China's aim
to consolidate its fragmented auto industry and create national players
that can take on the global auto giants. It's a policy that Beijing has
used in other industries, such as retail and steel, and is sometimes
carried out despite much resistance from the players involved.
For sure, analysts see potential benefits for SAIC from a partnership or
tie-up. Zhang Xin, an analyst at Guotai Junan Securities in Beijing, says
SAIC could benefit from Nanjing Auto's truck business, an area which the
Shanghai auto maker has been trying to beef up. Nanjing Auto has a
profitable but small joint venture with Fiat's truck unit Iveco,
producing light commercial vehicles. It also holds Yuejin Vehicle, which
produces heavy-duty and light trucks.
In 2005, SAIC and Nanjing Auto collided head-on in bidding for collapsed
MG Rover Group of Britain. Nanjing Auto won the bid, but in 2004 SAIC had
already acquired some intellectual-property rights for the Rover 25 and
Rover 75 models.
SAIC's joint ventures with GM and Volkswagen have catapulted it to the
top of the Chinese car industry, with sales last year of 1.34 million
vehicles. Meanwhile, Nanjing Auto's joint venture with Fiat has been one
of the poorest performers in China, and relations between the two are
strained.
More-modest cooperation that focuses on developing the MG brand could be
more beneficial for SAIC. SAIC used the Rover platform to launch its own
brand, the Roewe, which it started selling this year. So far, it has sold
8,000 Roewe 750s, which are based on the Rover 75 model.
For its part, Nanjing Auto inaugurated its production line in Nanjing in
March for MG model sports cars, and aims to begin selling them in China
by September. It has started production at MG Rover's former sports-car
plant in the U.K.
"For Nanjing Auto...rolling out its Rover platform needs a lot of capital
and [SAIC] will be a strong financial backer," says Citigroup analyst
Charles Cheung. "For [SAIC]...on the Rover side, they only have two
models. In order to ensure future continuous new models development,
obviously it makes sense for them to work with Nanjing Auto."
Citigroup initiated coverage of Shanghai Auto on July 3, with a "buy"
rating and target price of 23.20 yuan.
Shanghai Auto's net profit is expected to triple or quadruple this year
and the company has drummed up excitement with its new brand of Roewe
cars. But Mr. Zhang of Guotai Junan warns against reading too much into
earnings growth this year, which he says will be the result largely of
restructuring. He has a target price of 25 yuan for the company. Last
year, SAIC injected auto-related assets of 21.4 billion yuan ($2.82
billion), including stakes in the GM and Volkswagen joint ventures, into
the listed company. That turned what was mainly an auto-parts maker into
China's top car maker.
According to Thomson Financial, the full-year average earnings forecast
by five analysts is 4.74 billion yuan, or 71 fen a share, and 5.68
billion yuan for 2008, for a per-share earnings of 86 fen. In 2006, net
profit was 1.42 billion yuan, or a earnings per share of 22 fen.
(For more biz stories, please visit Industry Updates)
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