Chery revives IPO plans for expansion, perception boost

China Economic Review, August 2, 2009

In mid-July, Anhui-based Chery Automobile announced it would resume plans for a domestic stock listing it had shelved in March 2008. The company didn't give a timeline for the listing or say how much it expects to raise, but analysts said it's not surprising Chery is talking listing now. Markets are rallying – contributing to Beijing’s decision to lift the freeze on initial public offerings in late June – and Chery would be wise to seize the moment.

“It needs to raise capital if it is going to expand both domestically and internationally,” said Bill Russo, president of Synergistics Limited, a Beijing-based business consultancy with a focus on the auto industry.

Russo said Chery's plans for expansion are ambitious and include entering into mature markets such as North America, Europe and Australia. The company has also expanded from one to four brands – Chery, Karry, Riich, and Rely – to target businesses and higher-end consumers.

Chery currently has the capacity it needs to fulfill domestic demand. An IPO, however, would give the company the funding it needs to finance its brand roll-out and build up technical and production capacity. More funding would also help Chery build up dealer networks internationally to compete against established international players in their home markets.

But an IPO would be about more than just additional capital. It would also help Chery to change from a locally government-owned company into a publicly listed company, said John Zeng, senior market analyst for Asia automotive research with IHS Global Insight.

“Their financial information will be more transparent and their corporate governance structure will be more visible. Government officials won’t be able to put as much influence on the company,” Zeng said.

He cautions, however, that the degree of change depends on what percentage of Chery is publicly tradable. Synergistics’ Russo said he expected about 20% of the company to be listed, noting that while Chery would remain a state-owned firm, a listing would help with public perception.

“A Chinese company that doesn’t list has a perception of lack of transparency as to its true financial status,” said Russo. “So the process of listing will go a long way in alleviating those fears.”

While having little effect on the company’s operations, analysts say a listing would be more than cosmetic. While Chery is not the first Chinese automaker to pursue a listing, the company’s size and high profile mean that it could nonetheless send a strong signal to the international community.

“It’s another sign that the Chinese car manufacturers are taking steps to become global players, and a warning for the international players that the Chinese are there and wanting to get into the international market also,” said Klaus Paur, director of automotive research for North Asia, Greater China and Korea at TNS.

Perceptions are worth little without the products to back them up. Paur says Chery does not have the high-quality products needed to compete against international brands selling in China. That could cause problems for the development of the company’s luxury and business brands.

“If you’re not able to deliver the products that go along with your brand ambition then you destroy your brand image,” Paur said. Confidence from the market and financial community of Chery’s ability to deliver on its brand promises would determine its success or failure on the financial markets, he said.

The risks are unlikely to deter the company from pursuing its IPO, however.

“[Chery] had wanted to do this for quite some time, but with the meltdown last year they didn’t press the button,” said Synergistics’ Russo. “Now seems like an opportune time with the markets starting to rebound.”

No comments:

Post a Comment