Of the three listed China auto plays, Qingling Motors has always been viewed by the market as the ugly duckling. Now, investors aggressively bidding up the stock in the past few days may be hoping it will turn into a beautiful swan - following a helping hand from global titan General Motors. Denway Motors, which produces Honda Accord saloon, is seen as the premium China auto play, while minibus maker Brilliance China Automotive Holdings, with its ugly management, is usually preferred by analysts over Qingling. The lorry maker has been plagued by problems which culminated in a terrible earnings performance last year and its share price hitting a record low of 67 HK cents on October 10. That has not been a great return for investors who bought into its initial public offering back in August 1994 at $2.31. When it posts full-year results for last year, Chongqing-based Qingling is expected to say earnings dropped by 27 per cent to 189 million yuan (about HK$177.43 million), according to Thomson First Call. That will follow a 47.3 per cent slide in net profit for 2001. Qingling, which makes Isuzu lorries under licence, was struggling last year after rejigging its sales network and commission scheme, said Kenny Tang Sing-hing, an associate director at Tung Tai Securities. The margins for its high quality vehicles were eroded by cheap homespun competitors as its 'selling price is higher than domestic [lorries]. Buyers are looking for bargains', Mr Tang said. Investors are now prepared to look beyond those problems. The stock jumped a further 9.01 per cent to $1.33 yesterday and has now more than doubled since its October low. Some of the buying may be due to a hunt for laggards as fund managers seek hiding places in China plays from the fallout from a United States-led invasion of Iraq. 'Sometimes the rally will be led by quality plays and then followed by second and third liners. Qingling's quality is not as good as Brilliance or Denway,' said Eric Yuen, the head of research at Dao Heng Securities. But other investors may have been doing their homework and are betting that Qingling's day as a well-managed growth stock may finally be dawning. They may have zeroed in on Chinese-language newspaper reports that General Motors (GM) was interested in taking a controlling 38 per cent stake in Qingling, with the stake of the parent company owned by the Chongqing government being diluted to 35 per cent. Some reports even had GM chief executive Rick Wagoner getting the blessing of Premier Zhu Rongji for the move just before the Lunar New Year. Qingling had poured cold water on the talk and GM had been silent about it but the story did make sense, Deutsche Bank analyst Lawrence Ang said. GM only indirectly has a stake in Qingling now. The US firm owns 48.4 per cent of Isuzu, which in turn has 7.4 per cent of the Chinese firm. However, Qingling next month is about to start exporting engines and parts to Isuzu's domestic production lines, in a cost-saving, outsourcing move by the Japanese company. Once up to speed, the new export operation could add 120 million yuan a year to Qingling's bottom line and improve margins through economies of scale. Given Qingling's new, important role for Isuzu, the 7.4 per cent stake now looked inadequate, Mr Ang said. 'They need to restructure their shareholding structure to protect their interests,' he said. According to the reports, instead of using Isuzu, GM might go in directly and install its own management to take control of Qingling. That would be cost effective for GM even if they paid the $2.50 book value for new shares in Qingling. Qingling has modern factory facilities capable of turning out 80,000 lorries a year. It has only been using a fraction of that capacity, producing about 30,000 unit a year. But that means its enterprise value against unit of capacity is only US$2,736, compared with US$20,000 for Denway and US$11,000 for Brilliance, Mr Ang said. 'It is a hidden jewel that has the best equipment and best factory but unfortunately they didn't utilise it properly,' he said. GM getting its hands on Qingling's steering wheel also looks timely from a marketing sense. Late last year, China said it was raising the stake foreign firms could take in transport joint ventures from 50 per cent to 75 per cent, which was likely to bring in a wave of new foreign investment in the sector, Mr Ang said. When foreign transport companies bought their fleets, they were most likely to want to get Isuzu's quality vehicles than cheaper, less reliable domestic products, he said. And there is a huge potential market out there for trucking firms given that most goods transported inter-province presently go by barge or rail rather than road. Graphic: QING13gbz
