Motor Vehicles and Parts News
- Shanghai Auto may face growing pains
Date: 7-Aug-2007 Sources: (Shenzhen Daily)
IN the eyes of many investors, bigger is better for Shanghai Automotive Industry Corp. (SAIC). But there's no guarantee a greater size would smooth the road for China's leading carmaker.
Shares of SAIC's listed unit, Shanghai Automotive, have been surging for months, in part on speculation of a merger with smaller rival Nanjing Automobile (Group). In the first four weeks of July alone, Shanghai Auto's share price climbed 38 percent.
Then, two weeks ago, SAIC said it signed a letter of intent with the parent of Nanjing Auto for full cooperation. Details haven't been provided, and it's unclear whether cooperation will entail the full-fledged merger on which synergy-minded investors have bet.
Merger speculation wasn't the only factor fueling gains for Shanghai Auto, as it has reported sharply higher earnings and many analysts like its outlook.
The recent rise in Shanghai Auto shares makes some analysts wary. 'Probably the mainland investors got too excited about the acquisition - the bigger the better, that kind of mindset,'said Lehman Brothers analyst Yankun Hou.
A full-scale tie-up between the two groups could be a drag on Shanghai Auto, at least in the short term, said Hou, noting Nanjing Auto has posted operational losses in recent years. And in big mergers, there's no guarantee the execution intended to knit the two together will be smooth or successful in the long term, he said.
Shanghai Auto already faces challenges. Its income depends heavily on the performance of its joint ventures with General Motors and Volkswagen. Goldman Sachs warns that sales-volume growth at those ventures could weaken as core models become increasingly obsolete. Goldman also says competition in China's full-size car market, pivotal for Shanghai Auto, could intensify.
Moves by SAIC and Nanjing Auto to find common ground fit with China's aim to consolidate its fragmented auto industry and create national players that can take on the global auto giants. It's a policy that the government has used in other industries, such as retail and steel.
For sure, analysts see potential benefits for SAIC from a partnership or tie-up. Zhang Xin, an analyst at Guotai Junan Securities in Beijing, said SAIC could benefit from Nanjing Auto's truck business, an area which the Shanghai automaker has been trying to beef up.
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