BMW Wanting Bigger Say in China Leaves Partner Under Pressure

Downward pressure on the shares of BMW AG’s Chinese partner may not be over as investors gauge the impact of the German luxury-car maker potentially gaining a bigger stake in the companies’ joint venture.
Brilliance China Automotive Holding Ltd. has slid 20 percent since news emerged on July 12 about BMW’s plan, which would leave the Chinese company entitled to a smaller share of the venture’s future earnings. The stock is the worst performer this month among Chinese car stocks traded in Hong Kong. Haitong Securities on July 19 cutBrilliance China to sell from buy.
BMW is poised to become the first foreign car company to take majority control of its Chinese venture, a person familiar with the matter said this month. That raises questions about the profitability of Brilliance, which got most of its earnings from the partnership last year. Both Brilliance and BMW, which currently owns 50 percent of the venture, have yet to confirm the plan.
“The pressure on Brilliance’s share price is caused by the uncertainty on this recent news," said Steve Man, a senior car analyst for Bloomberg Intelligence in Hong Kong. “Obviously, a change in ownership structure will cut into Brilliance’s earnings.”
It isn’t clear how a stake increase by BMW would comply with the current Chinese rules. While China is opening up its car market -- the world’s biggest -- for global competition, for now foreign carmakers’ ownership in Chinese joint ventures is capped at 50 percent. China said in April it is scrapping the limit for electric-car ventures as soon as this year. For commercial vehicles, the cap will be eliminated in 2020 and the one for passenger vehicles will end in 2022.
Yet as trade relations with the U.S. worsen, China and Germany are forging closer ties with each other. BMW Chief Executive Officer Harald Krueger was in Berlin this month during a summit between Chinese Prime Minister Li Keqiang and German Chancellor Angela Merkel. Among discussions were opportunities to open up China more to foreign investment.
“Given the current trade tension between China and U.S., it makes sense for China to express goodwill toward European countries," said Patrick Yuan, an analyst at Jefferies Hong Kong Ltd. who reiterated his underperform rating on Brilliance on July 12. “The government is likely to further accelerate the pace of auto industry reform and it is highly likely that Brilliance will be the very first one.”
To be sure, analysts as a whole are still mostly in favor of investing in the stock, with 31 buy ratings, 2 sells and 5 holds, according to data compiled by Bloomberg. The average target price is 71 percent higher above where the stock now trades, and analysts on average project annual sales growth of about 9 percent over the next three years as the Chinese car market expands.
“We have seen previous periods when Brilliance’s share price corrected sharply and then rebounded,” said Janet Lewis, an analyst at Macquarie in Tokyo with an outperform rating on the stock. “Overall, I find volatility in the China auto sector much more extreme than in developed markets."

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