A case of the Benz
BAIC Motor IPO offers slow road to China luxury
BAIC Motor's initial public offering (IPO) is priced for cautious drivers. The Chinese automaker plans to sell shares in Hong Kong at HK$8.90 ($1.15), giving a relatively unracy market capitalisation of $8.6 billion. That reflects worries about the position that BAIC occupies within China's decelerating car market and a healthy degree of reservation over its premium ambitions.
The Beijing-based company has a three-speed business model. Its own-brand low-cost cars are not profitable. Earnings rely on two joint ventures with foreign partners. A partnership with South Korea's Hyundai Motor producing mass-market cars is the main cash engine, contributing around 5.4 billion yuan ($873 million) to the bottom line in 2013. A joint venture with Germany's Daimler to sell the premium Mercedes-Benz brand contributed less than 800 million yuan.
Mercedes is the focus of the IPO. BAIC Motor plans to use the bulk of the $1.4 proceeds to invest in the fastest growing segment of the market, where it ranks third among Chinese-foreign joint ventures in terms of sales volume. Premium cars sold more than twice as fast as overall passenger vehicles between 2009 and 2013. Still, Beijing Hyundai will continue to account for the lion's share of BAIC profits even under ambitious growth assumptions for the Mercedes business, say analysts at Bernstein.
That explains BAIC's valuation of 7.6 times forecast earnings for 2015, close to those of mass-market carmakers. Even that assumes BAIC will grow its earnings by 50 per cent next year. Brilliance China Automotive has almost twice the share of the joint venture premium market through its partnership with Germany's BMW. It trades at more than nine times and is forecast to grow its earnings 15 per cent between 2014 and 2015, according to Eikon.
BAIC's circuitous structure is also reason for caution. In China's car market, joint ventures with foreign partners dominate, but the question is always who calls the shots. BAIC owns 51 per cent of its alliance with Daimler giving it a majority of the economic exposure and half the board seats. Yet the German carmaker gets the presidency of the executive management committee. BAIC has potential, but its price reflects the reality of a mass-market firm without control where it counts.
The Beijing-based company has a three-speed business model. Its own-brand low-cost cars are not profitable. Earnings rely on two joint ventures with foreign partners. A partnership with South Korea's Hyundai Motor producing mass-market cars is the main cash engine, contributing around 5.4 billion yuan ($873 million) to the bottom line in 2013. A joint venture with Germany's Daimler to sell the premium Mercedes-Benz brand contributed less than 800 million yuan.
Mercedes is the focus of the IPO. BAIC Motor plans to use the bulk of the $1.4 proceeds to invest in the fastest growing segment of the market, where it ranks third among Chinese-foreign joint ventures in terms of sales volume. Premium cars sold more than twice as fast as overall passenger vehicles between 2009 and 2013. Still, Beijing Hyundai will continue to account for the lion's share of BAIC profits even under ambitious growth assumptions for the Mercedes business, say analysts at Bernstein.
That explains BAIC's valuation of 7.6 times forecast earnings for 2015, close to those of mass-market carmakers. Even that assumes BAIC will grow its earnings by 50 per cent next year. Brilliance China Automotive has almost twice the share of the joint venture premium market through its partnership with Germany's BMW. It trades at more than nine times and is forecast to grow its earnings 15 per cent between 2014 and 2015, according to Eikon.
BAIC's circuitous structure is also reason for caution. In China's car market, joint ventures with foreign partners dominate, but the question is always who calls the shots. BAIC owns 51 per cent of its alliance with Daimler giving it a majority of the economic exposure and half the board seats. Yet the German carmaker gets the presidency of the executive management committee. BAIC has potential, but its price reflects the reality of a mass-market firm without control where it counts.
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First Published: Dec 15 2014 | 9:32 PM IST