Brilliance Automotive: Restructuring is hard to blindly expand

Mergers and acquisitions have become the general trend of the Chinese auto industry, but FAW Group's restructuring of Brilliance Automotive will not be a successful case of it.

In the Chinese auto industry nowadays, the rumor of reorganization is like an entertainment star's scandal. The poor Brilliance car has become the object of many large car companies competing to show love.

The last one to throw hydrangea to Brilliance Automotive was FAW Group. According to sources, FAW Group will enter into Huachen Automobile and achieve control by purchasing the shares of the Brilliance Group, or adopting state-owned assets allocation.

However, this matter has not been confirmed by both parties. Brilliance China’s largest listed company, Brilliance China (01114.HK), issued an announcement saying that there are currently no negotiations or agreements related to the acquisition or sale. Bing Yumin, chairman of Brilliance Automotive Group, has repeatedly stated that Brilliance Automotive will develop independently.

However, one thing is certain. For Brilliance Motors, which is still small, it is necessary to continuously expand its own production and sales capacity in order to maintain its independent and independent development status.

In the past three years, Sui Yumin’s “multi-flowering” strategy has established an annual output of 150,000 Chinese cars, 120,000 Jinbei Haishi commercial vehicles, 44,000 BMW Brilliance BMWs, and 150,000 A-class vehicles. Production bases and plans to expand production at BMW Brilliance and Jinbei Vehicle Manufacturing Co., Ltd. will also build a new plant with an annual output of 210,000 vehicles in Mianyang, Sichuan Province. If this plan can be achieved, the total production capacity of Brilliance Automotive will increase from the current less than 500,000 to 800,000. To achieve this goal, Brilliance Automotive must continue to invest. However, after three years of rapid expansion, Brilliance Automotive lacked a lot of money.

Although Brilliance Automotive achieved a 19.6% year-on-year increase in the first five months of this year, sales reached 122,000 units. However, since most of these sales were contributed by small vehicles such as Junjie FRV with weak profitability and Jinbei minicars, the actual profitability has not been improved.

At the same time, under the influence of the global financial crisis, Brilliance China, Jinbei Automobile and Shenhua Holdings, three of Brilliance’s listed companies, basically lost their financing capacity. At the end of last year, Brilliance Automotive Group also injected capital of 500 million yuan to Huachen China to reduce its liabilities and supplement its cash flow.

In this case, GAC Group, which holds huge amounts of cash, became the first object of Brilliance’s car. The ambitious Southern Auto Company has been looking for acquisitions to quickly increase production capacity. However, there is no such thing so far. It has been reported that the reason for the suspension of negotiations between the two parties is that Brilliance Automotive insists on its own development.

Similarly, FAW Group's purpose in reorganizing Brilliance Motors is also to increase its scale. This old company headquartered in Changchun, Jilin was once the largest auto group in China, but after being surpassed by SAIC in 2005, this year it was overtaken by Dongfeng Motor Group (from January to May) and it has just fallen into the third place in China. Dazhou Automobile Group urgently needs to increase its production capacity through mergers and acquisitions and become China's largest automaker.

However, mergers and acquisitions and restructuring do not add capacity. Liu Zhigang, president of Brilliance Automotive Sales Co., Ltd., said that any reorganization between enterprises must see whether reorganization has any benefit to the brand, technology, and cost.

From the brand point of view, FAW Group already has two independent brands, Red Flag and Pentium. The demand for China Brilliance’s Chinese brand is not so urgent. In addition, since Brilliance Automotive has learned more from the German automobile manufacturing process, the Pentium brand enjoys Japanese automobile manufacturing technology, and it is difficult to reduce manufacturing costs through parallel production.

At the close on June 22, the stock prices of three listed companies under Huachen Motors, which clarified the reorganization rumors, all fell. One China Brilliance China closed at 0.95 yuan, the day fell 6.683%.

Guoxin Junan’s automotive analyst Zhang Xin said that there are more speculations about the rumors of the acquisition of Brilliance by FAW Group. “Investors should have enough vigilance.”
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