BEIJING – China Grand Automotive Services, China’s largest automobile dealership group by sales, plans to buy up to 75 percent stakes in luxury car dealer Baoxin Auto Group for HK$11.5 billion ($1.48 billion), according to the restructuring plan released by China Grand Auto on December 11.
The corporation plans to maintain Baoxin’s listing status in the Hong Kong Stock Exchange (HKSE) after the transaction while the corporation’s shares will remain suspended, as HKSE will conduct a post audit on related materials.
According to the plan, China Grand Auto will pay the offer via cash. Baoxin Auto’s shares are currently quoted at HK$5.99 a share and HK$0.266 per stock right. Of the 2.557 billion shares Baoxin has issued so far, China Grand Auto can acquire a maximum of 1.918 billion shares. If the corporation buys all these shares plus 11.6625 million copies of stock right, it should pay Baoxin HK$11.492 billion via cash.
The restructuring plan also mentions that Yang Aihua (the actual controller of Baoxin Auto), Baoxin Investment and Auspicious Splendid Global (two other companies that Yang controls) have promised to accept the partial offer of all Baoxin Auto’s shares they own. So far, Baoxin Investment and Auspicious Splendid own 1.242 billion and 0.128 billion shares of Baoxin Auto respectively, accounting for 48.58 and 5.00 percent of all the issued shares.
As a passenger vehicle dealership and automobile services company, Grand Auto retails passenger cars, supplies spare parts and provides aftersales services. The proportion of its middle and high-end brand sales has remained above 95 percent of total sales since 2012, while that of high-end brand sales alone accounted for a fifth of total sales. The company says that although high-end brands enjoy higher customer loyalty and larger room for profits, the company still attaches greater importance to brands like Audi, Mercedes-Benz and Volkswagen (imported) and less to others like BMW and Jaguar Land Rover, limited by the existing OEM policy and development strategies.
Baoxin Auto, on the other hand, focuses on luxury and super-luxury brands such as BMW, Jaguar Land Rover, Ferrari and Maserati. Its distribution network mainly covers the Yangtze River Delta Region, Northeast China, North China and East China, with 80 percent of the network covering regions including Zhejiang, Jiangsu, Shanghai, Beijing, Tianjin and Liaoning. This serves as a good complement to China Grand Auto’s network, which focuses on the mid-western part of the country. In terms of brand structure, the two companies also complement each other.
According to industry sources, China Grand Auto can obtain many resources related to brands of high-end passenger vehicle dealership services through the purchase of Baoxin Auto. This is conducive to optimizing its brand structure, improving the distributing network of the company’s dealership services and extending the advantageous business of aftermarket such as the financial leasing and used car transactions to the more economically developed eastern region.
After the transaction, China Grand Auto will become China’s largest BMW dealership group. This purchase will also bring about great changes in the automobile dealership group structure in China.
“The acquisition of Baoxin is an example of how auto dealers merge and restructure when the industry faces adverse conditions. It also reflects the capital and operational needs of the company,” Cao He, a national securities analyst, said to China Times. “If China Grand Auto succeeds in acquiring H-share listed company Baoxin Auto, it will become an A-share and H-share dual-listed company, which means its financing channels will be broadened.”
It is easy to notice from China Grand Auto’s moves in recent years that it has chosen a tough way to expand itself under pressure. The toughness is embodied in the process of entering the capital market when it continued to fail and restart: shifting from A-share to H-share and back to A-share and trying different ways of being listed, from IPO to BDL. However, Cao also noted that the company made an impressive “reverse move” by acquiring an H-share listed company soon after its back door listing on A-share.
According to statistics released by China Auto Dealers Chamber of Commerce (CADCC), around 90 percent of auto dealers operated at a loss in the first half of 2015. Zhu Kongyuan, secretary of CADCC, predicts that 30 percent of the current dealers in China are likely to close down in the future. Since there are currently 20,000 auto dealers in the country, the number of bankrupt dealers in the future might reach 6,000.
In fact, danger signals have already emerged in the level of dealers. At the end of 2014, 32 BMW dealers under huge pressure sent a petition letter to Karsten Engel, president and CEO of BMW Group Region China, asking for ¥6 billion in sales rebates.
Based on the annual research on auto dealers satisfaction issued by China Automobile Dealers Association (CADA), only 30 percent of auto dealers made profits in 2014 whereas average inventory days at 40 percent of the dealers exceeded two months. However, back in 2009 and 2010, nearly 70 percent of dealers were able to make profits. The current situation indicates that more and more auto dealers need transformation and new business models to turn losses into gains. China Grand Auto’s acquisition of Baoxin serves as a signal and opens up the possibility that more auto dealers will join the fray in mergers and acquisitions and restructuring.