BMW soon to face problems in China? If it is certainly not him who is directly concerned, the financial difficulties of Brilliance Auto, the parent company of its partner of its joint venture in China, could reflect on him. However, the Chinese company is the subject growing scrutiny from investors who are increasingly concerned about the ability of the SOE to juggle debt as the pandemic weighs on profits.
Brilliance and BMW: a rolling business
Brilliance Auto is the parent company of Hong Kong-listed Brilliance China Automotive Holdings, which produces vehicles with BMW in China through a joint venture. The joint venture builds the 3, 5 and 1 series and the X1 and X3 SUVs in China for BMW. It is also building the 60H from its exclusively Chinese brand Zinoro.
Rumors are growing lately about the group‘s growing difficulties in honoring its commitments. Fears heightened by the establishment by its banks of a creditors' committee to coordinate actions related to the repayments of the company's loans.
According to data compiled by Bloomberg, the Brilliance Group is due to repay 1.37 billion yuan ($ 200 million) in outstanding local bonds this year.
Brilliance Auto, also known as Huachen Automotive Group, saw one of its onshore bonds drop 35% in the interbank market on Thursday, hitting a record "low" amid growing doubts over its ability to refund. An "episode" which also caused the share price of Brilliance China Automotive to fall in parallel.
The financial health of the Chinese auto sector closely monitored …
The financial health of major operators in the world's largest auto market is being closely watched by global and domestic investors, particularly as leveraged companies grapple with pandemic pressure and declining domestic consumption.
After several notorious defaults among government-linked borrowers, there is also growing interest in the level of government intervention these companies face and the fallout for international companies linked to them.
Brilliance Auto has already agreed to sell some of its shares in the Hong Kong-listed subsidiary to another public unit.
With the possibility of further unit sales on the horizon, the future ownership of this important structure remains uncertain. In addition, the company is also expected to relinquish control of its joint venture with BMW by 2022, a crucial source of revenue for the group.
Brilliance: one of the largest state-owned enterprises in China
The history of Brilliance Auto dates back to 1949 (*), when the People's Republic of China was founded. It is one of the largest state-owned companies in the Northeast Province, employing 47,000 people (!). It has four companies listed on the Hong Kong and Shanghai stock exchanges, and approximately 160 units owned in whole or in part.
Brilliance Auto posted net profit of 11 billion yuan in 2019, up 12% from last year, largely due to contributions from the joint venture with BMW, according to its latest annual report.
Brilliance tries to maintain trust
The Chinese automaker said it had repaid all matured bonds without any defaults, according to a statement released Tuesday evening. He said his operations remained normal and that he would continue to meet his debt obligations.
According to a June report by Golden Credit Rating International, Brilliance Auto has low profitability and relies heavily on its joint venture with BMW. In addition, sales of the joint venture are expected to fall this year given the impacts of the coronavirus crisis.
Investors are now focusing more on Brilliance Auto's ability to honor its debt repayment over the next two years, with most of its longer-term debt affected by falling prices.
Market players are also watching closely whether the automaker can walk the talk when it says it will have no problem repaying its bonds.
(*) In 1949, the auto industry was in its infancy in China. 10 years later, Shenyang Automobile Factory, the "ancestor" of Brilliance is created. Formally, Brilliance Automobile was founded in 1992.
Our opinion, by leblogauto.com
Watch closely, the impact for BMW can be significant
But not only … At the end of 2017, Renault had joined forces with Chinese Brilliance around utility vehicles. An agreement described as strategic was signed in Paris in October 2018 between the two partners, still in the same field.
Groupe Renault and Brilliance China Automotive Holdings Limited (Brilliance) had agreed to create a joint venture to manufacture and sell light commercial vehicles (LCVs), under the Jinbei, Renault and Huasong brands.
Renault-Brilliance-Jinbei Automotive Co, Ltd. has its head office and manufacturing activities in Dadong District of Shenyang City and produces vehicles for three segments (minivans, vans and vans).
Renault had also confirmed plans for three new electric LCVs in the joint venture's lineup for China by 2020.
Sources: Bloomberg, Automotive News