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SCMP Reporter

The majority ownership of listed vehicle maker Brilliance China Automotive Holdings has changed hands at a 93 per cent discount to the traded price with barely a squeak from the market.

Brilliance China only fell 1.37 per cent to HK$1.43 yesterday, even though the Liaoning provincial government was able to buy 39.4 per cent of the company at just 10 cents a share.

In fact, analysts were even able to put a positive spin on the bargain basement stake sale by the Chinese Financial Education Development Foundation, which is more than living up to its billing as a non-profit making non-governmental organisation.

Morgan Stanley analyst Jerry Lou said: 'We view this as a positive step because it should ease investor concerns about the company.

'We believe this news will act as a trigger for a stock rerating.'

Morgan Stanley has a HK$2.90 price target on the stock. Alice Hui, of DBS Vickers, said the deal 'resolves the overhang of an ambiguous shareholder structure'.

Ownership issues may not be going away totally. For a start, former Brilliance founder and chairman Yang Rong, who has gone into self-imposed exile, is still pursuing a legal case to reclaim his interests. He may go to an overseas court after his case was transferred from Beijing to Liaoning provincial public security bureau.

While analysts may be excited about a potential joint venture with German car giant BMW, there are issues here too. Brilliance management may not have the final say in reaching a deal with BMW, Merrill Lynch analyst Grace Mak said. It could be that Liaoning government officials call the final shots.

However, Ms Mak was positive on the deal, pointing out that now the Liaoning government was the major shareholder, Brilliance would be able to obtain approval for new models and its venture with BMW more easily.

For some fund managers, the Brilliance saga once again highlights the risks of investing in Chinese companies.

'You have to be able to determine what the ownership lines are before it goes public. If you don't have it clearly defined, there's going to be more hanky panky,' said Brook McConnell, president of South Ocean Management.

Brilliance may look attractive given its share price is down 47 per cent from its high of HK$2.70 last year. It is expected to grow earnings 21 per cent next year and is trading on only 6.87 times the consensus projections of 23 analysts, according to Thomson First Call.

But fund managers are realising they cannot rely on analysts to go beyond earnings models and sniff out the management and ownership structure issues which can make the numbers irrelevant.

The flaws in the pocket-calculator approach to investing were exposed by the once-highly-rated orchid grower Euro-Asia Agriculture (Holdings) which had some great growth numbers, but ending up flaming out amid allegations its books had been cooked.

Despite the potential landmines facing holders of Chinese stocks highlighted by the Euro-Asia and Brilliance sagas, there had still been plenty of new money coming in, said Martin Lau of First State Investments.

The H-share Index has risen 16.55 per cent this year.

'China stocks are risky . . . but China is still one of the few places around where you can find meaningful growth,' Mr Lau said. 'There is so much liquidity around searching for growth, so stocks could get a rerating. I would not be too negative.'

Next year might just turn out to be a 'bubble' year for Chinese stocks listed in Hong Kong as they tend to run in two-year cycles. In 1997, there was the red-chip craze, in 1999 a merger and acquisition story and last year, there was a fever sparked by the opening of previously foreign-only B shares to domestic investors.

'People may get crazy next year. [It] could be anything, QDII, QFII, the market will make it up,' said Mr Lau, referring to market opening schemes for domestic and foreign investors.

Graphic: auto21gbz



Brilliance stake sale wins praise