Cars: BAIC IPO, Geely goes electric
Daimler's investment in BAIC indicates the latter may make a long-awaited IPO later this year, while Geely's purchase of bankrupt Managanese Bronze looks like a strategic mistake.
News bits from the automobile space indicate the long-awaited IPO by Beijing-based car maker BAIC Motor may finally be coming soon, while the struggling Geely (0175.HK) is chasing a couple of distracting new initiatives in the electric vehicle and overseas markets. Let's start with the BAIC news, as that looks the most interesting since it could provide investors with an interesting IPO opportunity later this year.
Media are reporting that BAIC's joint venture partner, German luxury automaker Daimler (Frankfurt: DAIGn), is paying 640 million euros for 12 per cent of BAIC. Daimler has said the deal makes it the first global brand to own a direct stake in a Chinese automaker, and added its investment was in preparation for a potential IPO by BAIC.
Under the deal, Daimler will gain 2 seats on BAIC's board. But perhaps most importantly, the deal will see BAIC boost its stake in its Daimler joint venture to 51 per cent, meaning BAIC can consolidate all of the joint venture's performance into its own results. That's an important accounting move, since BAIC, like many other major Chinese automakers, counts its foreign joint venture as one of its biggest assets with greatest growth potential.
Despite its status as one of China's largest domestic automakers, BAIC's name was absent from last year's list of the top 10 selling car brands in China, which was dominated by foreign names led by Volkswagen (Frankfurt: VOWG) and General Motors (NYSE: GM). BAIC has talked about an IPO for years now, but this investment by Daimler does appear to indicate that such an offering may finally be coming later this year, perhaps in Hong Kong. Big strategic investors often make such investments in the year before such offerings, both to show their support for the company and also to make some profits if and when the stock rises after the offering.
In this case, I personally wouldn't be too excited about this particular offering, since BAIC doesn't really impress me as one of China's more dynamic automakers. Daimler is also a relatively late arrival to China's luxury car market, which is currently dominated by German rivals BMW and Audi, both of which also build cars in China through their own joint ventures. Still, the IPO could do reasonably well since Daimler is still a bit global name and we haven't seen too many interesting Chinese auto IPOs for quite a while.
Meantime, let's take a look at Geely, which has announced it is buying out legendary but also insolvent British taxi maker Manganese Bronze for a token 11 million British pounds. Geely already owns 20 per cent of Manganese Bronze, which it purchased in 2006 for $85 million. The taxi maker struggled under an unsustainable cost structure, and was forced to declare bankruptcy last October.
I personally think Geely needs to focus on repairing its struggling Swedish Volvo car unit, which it purchased for $1.8 billion in 2010. This Manganese Bronze purchase will only become a distraction for Geely from its more important tasks, and I suspect Manganese Bronze will ultimately fail anyway.
In other news, Geely has also announced a new joint venture to produce electric cars with US-listed Kandi Technologies (Nasdaq: KNDI). Kandi investors certainly liked the deal, bidding up the company's stock by nearly 12 per cent in Friday trade on Wall Street. From my perspective, this move by Geely looks more symbolic and designed to please Beijing, rather than a serious attempt to develop its alternate energy vehicle business. Accordingly, I wouldn't expect too much from the joint venture, which will probably quietly go on to develop vehicles and perhaps sell a few thousand units but is unlikely to ever become a serious money maker.
Bottom line: Daimler's investment in BAIC indicates the latter may make a long-awaited IPO later this year, while Geely's purchase of bankrupt Managanese Bronze looks like a strategic mistake.