A "Brilliant" Buy

03/10/2006 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

"China is quickly becoming a car culture, having now surpassed every other nation in the world except the US in auto sales," notes Jim Trippon. Here, the editor of the China Stock Digest, looks at Hong Kong-based automaker, Brilliance Holding.

"The world’s automakers have invested over $13 billion to fund their expansion in China. There’s more to this gold rush than grabbing market share in a new region. Few investors are aware that a Buick Regal built and sold in the United States will return a profit margin of only $500. But a similar Buick with a Chinese name and Chinese point of manufacture delivers an astounding profit margin of approximately $4,000. No wonder GM has committed more than $3 billion to boost its production capacity in China to 1.3 million vehicles a year.

"All of the major automakers are struggling for a piece of the world’s fastest-growing motor vehicle market. In any rapid growth industry, investors have to worry about cashing in before the expansion curve hits a peak. In China, that peak seems very distant. Auto sales in the United States were relatively flat in 2005, coming in just short of 17 million units. By contrast, sales of all vehicles in China last year were approximately 6.5 million units. In the world’s most populous country, that leaves a lot of room for growth. That means investment opportunity.

"We intend to be ahead of the curve with the emergence of the world’s next automotive giants. Our latest pick is Hong Kong–based Brilliance Holding Ltd. (CBA NYSE), one of the leading automotive manufacturers in China. In 1992, it was the first mainland Chinese company to be listed on the NYSE. The company is best known in China for its minibus fleets that serve as police vans, ambulances, and other specialty vehicles. It’s the largest minibus maker in the country.

"The firm has a joint venture contract with BMW to assemble, produce, and sell BMW-designed and branded sedans in China. It has also established strategic partnerships or working relationships with Toyota, GM, Mitsubishi, Renault, Porsche, London Taxi International, and MG Rover. Despite its network of foreign alliances and numerous mainland subsidiaries, Brilliance has had a very difficult two years. This is definitely a ‘buy low, sell high’ opportunity, the ADR is sharply off its 2003 high of almost $60.

"The company is in the midst of a major reorganization. The new CEO, president, and executive director is also the firm’s largest shareholder, Qi Yumin. The firm has made massive strides since its previous lows in 1996, and it has the natural advantage of strong internal networks within China combined with powerful international partnerships. True, the company lost money in the first half of 2005, but those losses, at $42 million, were far lower than the financial hemorrhages experienced by US Big Three. And the key to the Brilliance Automotive story is the long-term potential.

"Clearly, this is an investment that has some risk attached, but we don’t believe there is any likelihood that Brilliance will disappear in the battle for market share. At the very least, we see Brilliance Automotive as an ideal takeover target when the Chinese auto industry reaches an inevitable point of consolidation in the future. The company’s dominance of the minibus market is a prize asset. We believe that investors have an opportunity to buy a major Chinese player at the bottom of a historic price cycle and may reap the rewards of a substantial rebound."

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