Brilliance China's parent reduces stake via $145 million placement

The deal is upsized by 25% after a recent share price rally proves not to be a deterrent.

Brilliance China Automotive's controlling shareholder last night reduced its stake in the Chinese car and minibus maker to 45.4% from 55.4% through a share placement, raising HK$1.125 billion ($145 million) in the process.  

The fully underwritten deal, which accounted for about 11 days' worth of trading volume, was well received by investors despite a massive rally in the share price over the past two months, allowing sole bookrunners J.P. Morgan to use the 25% upsize option in full. The trade-off was that the price had to be kept towards the low end of the offering range, but in light of the fact that the share price has tripled from a recent low of HK$0.78 on October 5, that was perhaps not too surprising.

The seller, Huachen Automotive Group, offered 400 million shares with an option to increase to 500 million in case of strong demand. The initial price range of $2.20 to HK$2.35 translated into a discount between 3.3% and 9.5%.

After a bookbuilding that lasted less than two hours, the deal was priced at HK$2.25 for a discount of 7.4%.

According to a source, about 50 investors came into the transaction and the total demand was about three times the final deal size. The order book contained very significant orders from high-quality long-only funds but there was also quite a bit of hedge fund participation, which one might not have expected at this time of year -- and especially not given the recent share price rally. Some analysts have argued over the past couple of weeks that most of the upside is now priced in and, of the 10 analysts that follow the stock according to Bloomberg, only two have a "buy" on it, compared with five "holds" and three "sells".

After being hit hard by the financial crisis last year, Chinese car manufacturers have become something of an investor favourite amid expectations of record sales this year. Among the Chinese car makers listed in Hong Kong, Denway Motors is up 115% since the end of last year, Dongfeng Group has rallied 387%, and Geely Automobile, whose parent company is in talks to buy Sweden-based Volvo from Ford, has added a massive 569%.

The turnaround has been sparked by a number of government policies to stimulate the market, including tax incentives for small cars and rebates for buyers in rural areas. Last month, the government said the subsidies will be extended for another year.

Brilliance was given an additional boost after it said in late October that it had agreed to sell its loss-making Zhonghua car business to its parent company for at least Rmb494 million ($72 million). The sale should see Brilliance return to profit in 2010 and should also result in less balance sheet stress, according to analysts at Citi. It will also transform the company into a "luxury passenger vehicle play", they argued in a research note last month.

Aside from the Zhonghua brand, the company also makes the Hiace minibus and the Granse multipurpose vehicle (MPV) -- all under its 51%-owned subsidiary Shenyang Brilliance JinBei Automotive. And it has a joint venture with BMW that makes and sells the BMW 3-Series and 5-Series cars in China.

Shortly after the news about the sale of the Zhonghua car business, Brilliance and BMW signed a memorandum of understanding to introduce new models and to build a second factory for the JV that will increase its annual capacity to more than 100,000 units by early 2012. The JV, in which Brilliance owns 49%, currently has one factory that can turn out 53,000 cars per year, although the capacity will be upgraded to 75,000 units by the end of next year.

Other positive news in recent months has included reports that Brilliance is on track to launch a plug-in hybrid electric car by 2013 and may also launch an electric vehicle in 2011 that will save energy use by 35% compared with conventional vehicles.

Huachen, a state-owned enterprise wholly owned by the Liaoning Provincial Government, came to the rescue of Brilliance earlier this year when the car maker was struggling to pay back a bond that was coming due. An injection of fresh cash to the tune of Rmb500 million solved the issue, but resulted in Huachen's stake in the company rising to 55.4% from the original 39.4%. Given the sharp rise in the share price, it isn't surprising to see the parent now realise some of the profits it has made on that additional investment. The injection was completed in May at a price of HK$0.43 per share, which represented a 10.3% premium to the market price at the time. Huachen will be subject to a 90-day lockup on its remaining shares.

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