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MarketScreener Homepage  >  Equities  >  Stock Exchange of Hong Kong  >  Brilliance China Automotive Holding Ltd.    1114   BMG1368B1028

BRILLIANCE CHINA AUTOMOTIVE HOLDING LTD.

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BMW to buy control of China venture in 'new era' for foreign carmakers

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10/11/2018 | 10:46pm EST
Flags with the logo of BMW flutter at the venue of a ground breaking ceremony for a new BMW assembly plant, inside the BMW Brilliance Plant Tiexi, in Shenyang

SHENYANG, China (Reuters) - Germany's BMW will pay 3.6 billion euros ($4.2 billion) to take control of its main joint venture in China, the first such move by a global carmaker as Beijing starts to relax ownership rules for the world's biggest auto market.

The luxury carmaker said on Thursday it would increase its stake in its venture with Brilliance China Automotive Holdings Ltd to 75 percent from 50 percent, with the deal closing in 2022 when rules capping foreign ownership for all auto ventures are lifted.

The move will likely spur BMW to shift more production to China, helping to protect profits amid a whipsawing trade war between Washington and Beijing that has raised the cost of BMW importing cars manufactured at its U.S. plant in South Carolina.

The deal also marks a milestone for foreign carmakers which have been capped at owning 50 percent of any Chinese venture and have had to share profits with their local partner, and could encourage rivals such as Mercedes maker Daimler.

"We are now embarking on a new era," BMW Chief Executive Harald Krueger said in a speech in Shenyang, northeast China, where the joint venture is based. He thanked Chinese Premier Li Keqiang, whom he said "personally supported" the plan.

Evercore ISI analyst Arndt Ellinghorst called the deal a major breakthrough. "In the future, BMW will have the full control over the biggest regional profit pool of its business," he wrote.

Beijing has been keen for global carmakers to invest more in China and has also eased restrictions that cap foreign ownership of electric vehicle businesses at 50 percent.

The joint venture plans to add a new plant, spending over 3 billion euros on a large-scale expansion of the existing production facility, Krueger said.

Yale Zhang, head of Shanghai-based consultancy Automotive Foresight, said: "Others will follow over time, but the divorce schedule depends on how strong or capable the local partner is."

Daimler's Chief Executive Dieter Zetsche told Reuters last week that recent signals from the Chinese authorities were encouraging, but the German carmaker did not yet have legal permission to make a move.

"If we do, we need to see what opportunities there are," Zetsche said at the Paris Motor Show, adding any steps depended on talks with BAIC Motor Corp, Daimler's partner in joint venture Beijing Benz.

As trade tensions have escalated, China's government has pledged to open up its markets more widely, including cutting taxes on imported vehicles, cancer medicines and a range of consumer goods.

The country's leaders have also played up other milestone deals such as German chemical maker BASF winning approval in July to build China's first wholly foreign-owned chemicals complex.

The rule changes have already helped Tesla Inc gain Beijing's approval for a wholly-owned manufacturing and sales company in Shanghai, the first time a foreign carmaker will be able to establish a full presence in China without a partner.

BMW is one of the biggest exporters of vehicles from the United States to China, putting it firmly in the crosshairs of the trade war.

"Given the trade dispute between the U.S. and China, there is a powerful incentive for automakers to produce vehicles in the market where they sell them," said independent auto industry analyst James Chao.

He said control of the joint venture could spur BMW to bring production of models like the BMW X4, X5 and X6 sport utility vehicles, which are currently built in the United States, to China.

NOT BRILLIANT FOR BRILLIANCE

But if the move is a big win for BMW, it spells a diminished role for its Hong Kong-listed partner.

Brilliance, which makes the vast majority of its revenue from BMW-branded cars, has seen its shares tumble nearly 50 percent this year on talk that such a deal was in the offing.

The firm's shares were suspended on Thursday, but plunged as much as 30 percent on Friday to a 28-month low, with analysts saying the deal would substantially decrease Brilliance's long-term value.

Brilliance Chairman Qi Yumin lauded the venture's past success and said the future offered further opportunities, in comments posted on the firm's WeChat account. He added that while the situation was complex, the partners would need to "stick together through thick and thin".

A number of carmakers said earlier this year they had no immediate plans to change their Chinese joint venture structures despite the planned rule changes.

But Chinese demand for mass-market passenger cars has fallen, increasing the dependence of some local players such as BAIC on income from ventures with premium brands like Daimler.

Industry insiders and analysts fear sales could fall this year for the first time in decades. China auto sales dropped in July and August.

BMW finance chief Nicolas Peter, however, said the firm remained bullish about its top market.

"Number one reason why we invest in China is because we are absolutely convinced the market has a further growth potential," Peter said in an interview at the Shenyang event. He said the firm was also investing in extra capacity in the United States.

The term of the joint venture will also be extended to 2040 from 2028.

(Reporting by Norihiko Shirouzu in Shenyang, Additional reporting by Edward Taylor in Frankfurt and Yilei Sun and Gaurika Juneja in Bengaluru; Writing by Adam Jourdan; Editing by Edwina Gibbs, Georgina Prodhan and Mark Potter)

By Norihiko Shirouzu

Stocks mentioned in the article
ChangeLast1st jan.
BAIC MOTOR CORP LTD -3.19% 5.16 End-of-day quote.23.44%
BASF 2.79% 66.32 Delayed Quote.9.80%
BAYERISCHE MOTOREN WERKE 2.05% 70.77 Delayed Quote.0.10%
BRILLIANCE CHINA AUTOMOTIVE HOLDING LTD. -5.36% 7.59 End-of-day quote.32.23%
DAIMLER 2.66% 50.61 Delayed Quote.10.24%
TESLA 1.35% 307.88 Delayed Quote.-7.49%
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Financials (CNY)
Sales 2018 5 095 M
EBIT 2018 -608 M
Net income 2018 6 504 M
Debt 2018 1 376 M
Yield 2018 2,08%
P/E ratio 2018 5,08
P/E ratio 2019 4,32
EV / Sales 2018 6,75x
EV / Sales 2019 5,54x
Capitalization 33 043 M
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Mean consensus OUTPERFORM
Number of Analysts 35
Average target price 9,39  CNY
Spread / Average Target 43%
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Managers
NameTitle
Yu Min Qi President, CEO & Executive Director
Xiao An Wu Chairman
Zu Ming Qian Chief Financial Officer & Executive Director
Bing Jin Xu Independent Non-Executive Director
Jian Song Independent Non-Executive Director
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