Great Wall Motor must convince investors it is not destroying value

THE CHINESE DRAGON is flying high. But when you grab its tail hoping to see your fortunes soar, you'd better hold on tight. Don't underestimate the ability of management at mainland companies to destroy value.

Great Wall Motor is a case in point. On Thursday, the company unveiled a share placement plan that stunned investors. The company will sell 300 million shares, 1.14 times greater than the size of its initial public offering in 2003. The estimated HK$1.6 billion in proceeds will be used to build five vehicle parts plants.

Investors were furious. Many of them only recently began to take a second look at mainland vehicle stocks in light of better than expected first-half results. Great Wall, the country's largest privately-owned vehicle company, looked especially attractive.

Now fund managers and analysts are battering the company with phone calls demanding an explanation for the placement to which they must subscribe lest their stake in the company be diluted. Read the company's financial statements to understand their concern.

Great Wall is sitting on a large pile of cash - 2.4 billion yuan as of June 30. It has yet to fully invest the HK$1.55 billion it raised from its initial share offering. Its sports utility vehicle and pick-up truck business is also generating operating net cash flow of more than 500 million yuan a year. Moreover, Great Wall has no long-term debt and hasn't had any since 2004.

With an equity base of 4.12 billion yuan, the company can easily raise 1.5 billion yuan to two billion yuan through bank loans or the sale of convertible bonds. In fact, for the greenfield projects Great Wall plans, convertible bonds would be a better financing option. It would eliminate for now the need for a dilutive share sale until the plants are up and running and, presumably, profitable.

Toss in a placement equal to just 20 per cent of the shares outstanding - which would not need shareholder approval - and Great Wall would have no problem financing a HK$5 billion expansion.