Car Partners Turn Road Warriors over IPO Plan

(Beijing) -- While millions of cars rolled off its assembly lines, Beijing Automotive Industry Holding Co. Ltd. (BAIC) has spent the past few years spinning wheels over plans for shareholder restructuring and a public listing.

State-owned BAIC appears to be making progress. Caixin learned from company sources that a new shareholding structure would likely be announced by late July – a move seen as prelude to a public offering.

A source close to BAIC told Caixin that the group's long-range plan calls for current shareholders of its subsidiary Beijing Automobile Investment Co. to become the main shareholders of a new, public company.

Nevertheless, the listing proposal remains in limbo more than two years after winning regulatory approval. Company officials have yet to name a stock exchange for an initial public offering, even though a source told Caixin that a back-door listing in Hong Kong has been mentioned in the past. And financial details have not been released.

Also undecided are which assets from the sprawling group, which currently includes two joint ventures with foreign manufacturers, might be incorporated into a publicly traded company.

The greatest obstacle to progress for the IPO plan appears to be South Korea's Hyundai Motors, Beijing Automobile Investment Co.'s partner in the group's largest passenger car venture, Beijing Hyundai.

Hyundai officials have displayed "a strong lack of cooperation" toward listing efforts, sources close to BAIC told Caixin. Moreover, the foreign partner's uncooperative attitude is said to be the core reason for delays in the launch of BAIC's public company.

Beijing Automobile Investment and Hyundai each hold a 50 percent stake in Beijing Hyundai, which accounts for almost half the group's profits. The venture sold 570,000 vehicles last year, or 47 percent of the group's total sales of roughly 1.2 million cars and trucks.

Incorporating Beijing Hyundai's assets into a new, public company would smooth the path for a successful IPO, say BAIC officials. But if Hyundai refuses to let BAIC inject the venture's Chinese assets into a listed entity, the group could take another route to the stock market.

One way could involve a new, all-Chinese auto business with products based on BAIC's recent acquisition of machinery and technology from Sweden's Saab. That business is now taking shape with plans for the company's new car models to be on dealer lots before 2012.

Vacillating Plans

BAIC officially initiated a listing plan in early 2008 and hired the necessary intermediaries. The plan was soon approved by the Beijing State-owned Assets Supervision and Administration Commission (SASAC), and in May the group formed an IPO planning team and announced late 2008 as the launch target.

The target date came and went. And about a year later, BAIC Chairman Xu Heyi told Caixin the main reason for the lack of progress was that "the listing plan has yet to be confirmed."

A source close to BAIC said company executives were vacillating during that time between listing the entire group and limiting the public concern to passenger car operations.

In addition to Beijing Hyundai, BAIC operates a joint automaking venture with Germany's Daimler called Beijing-Benz Automotive Co. It's also the principal stakeholder in commercial truck manufacturer Beiqi Foton Motor Co., and a maker of light trucks called Beijing Automobile Works Co.

Proposals to include Beiqi Foton in the listed company sparked internal disputes. But BAIC executives have apparently settled the debate, according to Wang Dazong, the group's general manager, who told Caixin the group supports Beiqi Foton's independence and will exclude its assets from a listed company.

Obstructionism

Meanwhile, Hyundai makes no secret of its opposition to a BAIC listing. And its opinion matters; without Beijing Hyundai assets, a BAIC public company would be unlikely to generate much enthusiasm among capital market investors.
   
A BAIC source said the Beijing Hyundai business contributed more than 50 percent to the group's revenues of more than 100 billion yuan and profits about 10 billion yuan in 2009.

Beijing Hyundai sold 330,000 vehicles in the first quarter 2010, equal to nearly 45 percent of BAIC's total sales for that period. Meanwhile, BAIC sold 740,000 vehicles in the quarter, posting revenues of 73.7 billion yuan and earning 5 billion yuan.

Like other foreign partners in joint ventures with Chinese automakers, Hyundai has been in charge of introducing vehicle models built by Beijing Hyundai. It also takes the lead in company procurement and controls key departments such as finance.

Hyundai appears worried that a listed entity would become a strong competitor and control access to proprietary information now in the hands of Beijing Hyundai.

South Korean executives have even been accused of obstructionism. A BAIC source told Caixin that Beijing Hyundai officials prevented BAIC officials from conducting a pre-listing audit by closing the plant's front doors and blocking the entrance.

South Korean company officials also prevented their Chinese partners from accessing and investigating the financial status of the joint venture company on several occasions, the source said.
 
BAIC and Hyundai officials have held "dozens" of official and unofficial discussions that ended without agreement, the source said. Government agencies including Beijing SASAC have tried to mediate but without success.

BAIC's way around Hyundai could be to develop its own car brands and grow independent assets that attract stock investors. But the process could take years.

"Without a Beijing Hyundai asset injection, BAIC has to develop its own brands, to a certain extent, before being able to list," a source close to BAIC executives said. "This would probably take two to three years, or even longer."

The Saab deal reached in December 2009 could help BAIC reach the private product goal. As part of a 4 billion yuan investment, the company spent US$ 200 million for intellectual property rights that it's using to develop exclusive mid- to high-end sedans.

Production of up to 300,000 BAIC sedans a year based Saab technology is expected to begin soon. The first luxury sedan for the Chinese market could be ready for the market by late 2011, giving the company good reason for a stock listing regardless of Hyundai's position.

1 yuan = 14 U.S. cents