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GAC Group to explore new growth pattern with expanded financing

GAC Group (601238.SH) announced on June 23 to issue A-share convertible bonds worth ¥6 billion ($960.6 million) after an aborted plan of raising ¥2 billion in 2012, according to a signed article published in Huaxia Shibao or China Times.

The group aims to explore a new pattern for future growth with the tripled financing volume.

Existing A-share stockholders have priority for subscription to the convertible bonds with a term of six years, according to the GAC Group announcement.

The financing plan was not deliberated at the group’s shareholder meeting on June 30. “Eight proposals were examined at yesterday’s meeting, including the 2013 Annual Report and 2013 Work Report of the Board. But the plan of raising ¥6 billion was not discussed. It will be delivered to the meeting for consideration at a proper time,” GAC Group board secretary told the media on July 1.

Funding allocation

GAC Group has already clearly planned where the money will go although the debt financing proposal has not been officially approved.

The financing will be used for the Highlander upgrade, capacity expansion and new model launches at GAC-Toyota Motor Co., Ltd., GAC-Fiat Auto Co., Ltd.’s Guangzhou plant, GAC Motor capacity expansion to 200,000 units per year, the Trumpchi A68 (GA5 upgrade), A28 and AL, GAC Business Co., Ltd. (GACBC) financing and leasing business, Urtrust Insurance Co., Ltd. capital increase and working capital supplement, according to the announcement (see table below).

Allocation of money to be raised (¥million)


 Total investment

GAC Group investment

Money from financing

Rate in total financing (%)

GAC-Fiat Guangzhou plant





GAC-Toyota capacity expansion





GAC-Toyota Highlander




Trumpchi GA5





Trumpchi A28


Trumpchi AL


GAC Motor capacity expansion




GABC capital increase





Urtrust Insurance capital increase


The allocation of the money demonstrates that GAC Group is exploring a new growth pattern, according to Jin Xue, author of the article.

“The project of expanding capacity of GAC Motor from 100,000 to 200,000 vehicles is progressing smoothly and the expanded facility will go into operation in October,” a GAC Motor executive was quoted as saying. GAC Motor is a subsidiary of GAC Group and makes independent passenger vehicle brands.

The Trumpchi A28, an SUV based on an A-class platform, and the Trumpchi AL, a C-class passenger car, are expected to hit the market next year or the year after next, according to the executive.

Debt financing necessary

GAC Group planned to issue ¥2 billion of convertible bonds but canceled it in October 2012, only one month after the plan was released. The current financing plan triples amount of the aborted one two years ago.

The group’s total debt financing in the past two years has reached ¥12 billion, including this year’s ¥6 billion of convertible bonds and ¥6 billion of corporate bonds approved by the China Securities Regulatory Commission (CSRC) in January 2013.

The group’s operating cash inflow and outflow increased 49.81 and 52.89 percent respectively in 2013. Its net cash inflow was ¥978 million last year, a slight rise of 2.33 percent from 2012.

The cash inflow and outflow rose 52.42 and 49.15 percent respectively in the first quarter of this year. The net cash flow reached ¥53 million, a better result compared with the negative ¥57 million in the first quarter of 2013.

In the first three months of 2014, net profits for the parent company were ¥849 million, up 77.57 percent. Operating revenue increased by 19.85 percent to ¥4.75 billion. Earnings per share reached ¥0.13, a significant increase of 85.71 percent compared with the same period of last year.

Despite positive cash flow and huge profits this year, GAC Group still needs debt financing because it has invested heavily in M&As in recent years and has huge capital demands for future development.

The group sold more than 980,000 passenger vehicles in 2013, up 46 percent. Passenger vehicle capacity utilization increased by 22.06 percent to 74.06 percent last year.

New growth pattern

The independent GAC Motor will need a total of ¥2.2 billion in financing, accounting for 36.53 percent of the ¥6 billion. GAC-Fiat will need ¥800 million and GAC-Toyota ¥712 million, accounting for 13.33 and 11.87 percent respectively.

GAC Motor, GAC-Toyota and GAC-Fiat are expected to be the three drivers for GAC Group’s future growth. Taking in the lion’s share of the financing, GAC Motor is expected to play a leading role among the three drivers.

Analysts believe that boosting sales of European and Fiat-owned American brands will help change the existing lineup of joint venture brands dominated by Japanese OEMs. Promoting GAC Motor brands will help enhance the group’s indigenous R&D capability and competitiveness. A proper growth of Japanese brands will be conducive to maintaining their existing status.

Balancing the three growth divers and achieving the ultimate goal of strengthening independent brands may be a new blueprint of GAC Group in its future development.

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