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Smaller mainland carmakers ponder H shares

Fear of closure or takeover may spark a listing rush as new rules force a consolidation in the sector

The impending consolidation of the mainland's car market is expected to spark a rash of H-share listings by medium-sized carmakers to ensure their survival.

An H-share listing is considered a faster way to go public as there is a long queue of listing candidates for the A-share market, where regulators are reining in the number of listings to avoid dampening already weak market conditions.

AviChina Industry & Technology, the country's fourth-largest carmaker by volume, kicks off an international roadshow on Monday in Hong Kong to market its US$150 million H-share offering.

It plans to spend about 1.9 billion yuan (HK$1.78 billion) between now and 2007 in expanding car and parts production, according to a research report by co-sponsor BOC International.

A listing status will facilitate the firm's future financing because its net debt to equity ratio is expected to rise to 77.98 per cent by December from last year's 46.6 per cent, reducing the room for it to obtain further bank loans.

Changcheng Auto - the country's largest pick-up truck and third-largest special utility vehicle (SUV) maker - was expected to market its US$150 million initial public offering next month, market sources said. BNP Paribas Peregrine is the listing sponsor.

Competition in China's passenger car market is set to heat up in the next few years as domestic and Sino-foreign joint ventures jostle for market share by expanding capacity, with overcapacity, price wars and market consolidation expected to ensue.

'Some of the players will be eliminated and their fate depends on whether they have sufficient cash,' said an industry analyst at a European brokerage. 'It will be more difficult without a listing status.'

He said A-share listings were harder to come by because there was a long queue and more restrictions compared with an H-share listing.

Under draft policies being considered by the State Council, Beijing plans to stipulate that by 2010, half of all cars sold in the mainland must come from domestic firms that wholly own the car's technology.

The move, coupled with overcapacity, will see most small carmakers with no design capability and those relying on the assembly of imported parts facing closure or takeover by rivals.

The country's 123 carmakers have the capacity to produce 5.5 million vehicles annually - or about 50 per cent more than actual sales last year. Just two companies had annual production of more than 500,000 units and eight others had output of more than 100,000 units. About 75 firms make 1,000 or fewer cars a year.

Several firms are already preparing to list to increase their chances of survival.

China's only private carmaker, Geely, is widely expected to seek a backdoor listing by injecting assets into Guorun Holdings, which has formed a joint venture with Geely.

Trading of Guorun shares was suspended yesterday pending an announcement that the joint venture with Zhejiang Geely Guorun Automobile had reached a binding agreement to buy 450 million yuan of assets from Geely, sources familiar with the deal said. A non-binding memorandum was signed last month.

Southeast Motor, a joint venture between the mainland's Fujian Automotive Industry and Zhonghua Motor Corp of Taiwan, which makes Mitsubishi cars, had been preparing for an A-share listing for more than a year, analysts said.

Japan's Mitsubishi is in discussions to buy a stake in the joint venture.

Zhengzhou Nissan - a Paladin-brand SUV joint venture between Zhengzhou Light Automobile and Japan's Nissan - and Hebei Zhongxing Automobile, a joint venture between Zhongxing Automobile Group and Taiwan's United Leader Holdings, were also eyeing listings, analysts said.

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