The Anhui-based automaker Jianghuai Automobile Co., Ltd. (JAC, public-listed 600418.SH) approached underwriters in early July to lobby for more investments so as to gain bigger leverage during the coming merger with Chery.
It seems that JAC’s senior management is eager to deliver to the capital market positive news about the development trends of the company.
Chery – the other side of the story – also started fund raising in early June. Industry analysts believe that both companies are maneuvering for an advantageous position in a possible future merger.
Greater Anhui Motors
Both JAC and Chery are State-owned automakers in Anhui Province. Though no official announcement about a merger has been released so far, “the merger between Chery and JAC is inevitable and the idea was first raised in 2002,” said Liang Huaping, director of the Anhui Automotive Industry Association.
Early in 2006, the Anhui State Asset Administration Committee brought up the idea of building a Greater Anhui Motors by merging JAC, Chery, Ankai Bus and an automotive supplier in the province. JAC’s chairman Zuo Ya’an would become chairman and Party chief of the new conglomerate, while Chery’s chairman Yin Tongyue would be president and director of the Chery division. The intended Greater Anhui Motors at that time aimed at total annual production and sales of 1.2 million units of vehicles and ¥80 billion ($11.77 billion) in revenue of supplier business.
This was a backup plan at the time in case JAC failed to get approval to produce passenger vehicles. The plan was later dropped after JAC received its PV license from the central government.
On May 12 the Anhui provincial government published the Anhui Automotive Industry Readjustment and Revitalization Plan (the Plan), again calling on local automakers like JAC, Chery, Hualing, Changhe and Yangzi to consider mergers. The Plan proposes to build an automotive manufacturing group with over 1 million units in annual capacity, 2-4 advanced automotive suppliers and 5-7 related industrial chains. The idea of a Greater Anhui Motors again emerges.
Funding for leverage
As the mostly likely solution to a quick merger of existing automotive companies in Anhui is cross shareholding and cross managing, both JAC and Chery have been busy contacting underwriters. Company stock price and net assets play a significant role in mergers and acquisitions.
Shanghai Automotive Co., Ltd. (a public-listed subsidiary of SAIC, 600104.SH), for example, earmarked ¥2.095 billion to purchase Nanjing Automobile Corp. (NAC). The share price of Shanghai Automotive was only ¥5.4 on September 30, 2007, yet it skyrocketed to ¥26 six months later when the acquisition went through.
It is easier for JAC to raise its stock price than to increase its net assets in the short run. Higher market value will give it more leverage in merger negotiations. JAC’s senior management is obviously trying hard to instill more confidence in investors. “They seem to expect a major rise in stock price in a short time,” noted an analyst.
Chery’s plan for an IPO did not succeed last year due to the market situation. Company management is aware that its high ratio of liabilities to assets and low net assets will drag it into a disadvantageous position in a possible merger with JAC. Since it could not risk diluting its assets by asking more bank loans, it sold 20 percent shares for ¥2.9 billion on June 3 to five assets management companies: Huarong Asset Management Co., Ltd., Bohai Industry Investment Fund Management Co., Ltd., Shenzhen branch of China Merchants Venture Capital Management Co., Ltd., Financial Asset Management Ltd. and Tak CDH Equity Investment Management (Tianjin) Co., Ltd.
An analyst points out that Chery sold its shares at a premium price to increase its chances of IPO. Even if an IPO fails, it helps lift Chery’s net assets and bargaining position in a merger with JAC.
Though Zuo Ya’an spends much time and energy lobbying investors, he is unlikely to convince them to reach in their pockets immediately. JAC posted a sharp drop in performance last year, and it was still losing money as of the first quarter this year.
“JAC has already survived its worst times,” said a company insider. “It has now transformed from a pure commercial vehicle maker to an integrated manufacturer of both passenger and commercial vehicles.” JAC’s senior management also stated that its PV project has recently turned profitable, and its traditional strong segments of MPVs and light trucks have gained higher market shares and profits.
JAC sold 22,503 passenger cars in the first five months of 2009, up 316.87 percent against the same period last year. Yet its sales champion was still the Tongyue, an economy car with lean profits. Currently, JAC’s major source of profit comes from MPVs and light trucks. The Refine MPV contributes 35 percent in revenue from auto manufacturing and 70 percent in profits. But the overall MPV market is on the decline this year and profit from the Refine is likely to be lower in the near future.
JAC’s second core business is light truck, which also brings in lean profits, or about 20 percent of the company profits. JAC has been adjusting product structure by launching more light trucks with high added values to increase profit margins. A new challenge in the light truck segment is the State III emission standards to be implemented in the second half of 2009.
Wen Xiang, an analyst with Guoyuan Securities, is more optimistic. The breakeven point of JAC’s PV segment is estimated at 70,000 units. JAC will be moving closer to that point this year if it sells 58,000 cars and 10,000 Rein SRVs. Wen said that it is hopeful for JAC to break even in PVs at the end of 2009 and turn profitable in 2010.
Rewritten by Louise Liu based on author’s story published in
21 Shiji Jingji Baodao or 21st Century Business Herald