Shanghai Automotive Co, the listed subsidiary of Shanghai Automotive Industry Corp (SAIC), yesterday said it would buy 20 billion yuan (US$2.5 billion) of assets from its parent company as part of a plan to raise funds in overseas markets by selling new shares in an initial public offering (IPO).

Shanghai Automotive would also pay 18 billion yuan (US$2.2 billion) for 3.1 billion new shares at 5.8 yuan apiece, and 2 billion yuan (US$300 million) in cash for the assets, according to a company statement.

Shares in Shanghai Automotive closed at 6.22 yuan (78 US cents), up 10 per cent, on the Shanghai Stock Exchange yesterday with the P/E ratio at around 18, compared to the industry average of around 15.

The transaction would allow Shanghai Automotive to gain what the companies call SAIC's premium assets in its joint ventures Shanghai GM and Shanghai Volkswagen and SAIC's car-finance service unit. If it goes through it would make Shanghai Automotive China's largest listed car company.

The acquisition of SAIC's assets would transform Shanghai Automotive into a fully integrated car manufacturer with assets in excess of 30 billion yuan (US$3.7 billion). The economies of scale could help improve the company's profitability and enhance its capability in raising money in the capital market, stock analysts said.

"As SAIC's premium assets are transferred to Shanghai Automotive, it will make Shanghai Automotive more transparent and easier for it to raise money in the capital market," said Hu Song, an analyst with Shanghai-based Haitong Securities Research Centre, a stock consulting firm.

In its statement, Shanghai Automotive said the transaction would sharpen the company's competitive edge and the injection of premium assets would increase its options. It would also help in the company's restructure to create a more transparent operation.

"SAIC may inject more assets in its listed arm in the future, including its sales units and second-hand auto business," said Hu.

The market value of SAIC stands at 39.6 billion yuan (US$4.9 billion), including joint ventures with General Motors and Volkswagen, its R&D unit and its nationwide sales and car-finance business.

Hu said Shanghai Automotive may push the stock market and that other firms involved in the car industry would benefit.

Yale Zhang, a consultant at CSM's Shanghai office, an auto consulting firm based in Detroit, told China Daily yesterday the move would facilitate SAIC's future IPO in the overseas capital market.

SAIC has been considering an IPO since 2004, initially looking to list its shares in Hong Kong.

But pressure from SAIC's partners, including European carmaker Volkswagen, aborted SAIC's IPO plans, a source close to the company told China Daily in a recent interview.

"In the long run, SAIC need to raise money to develop their own brands and launch new models," Zhang said.

SAIC is planning to develop passenger cars under its own brands based on technologies from bankrupt British automaker MG Rover. The first model is expected to be launched by the end of this year.

In 2004, the company acquired the engine assemblies and technologies of the Rover 25 and Rover 75 cars with US$123 million, while its rival Nanjing Auto acquired MG Rover's factories in Longbridge and other assembly lines.

SAIC is planning to spend 13.7 billion yuan (US$1.7 billion) to build up to 300,000 passenger cars by 2010, according to the company's statement.

But SAIC has not yet named its vehicles looking to acquire MG Rover's brand from owner BMW. BMW has lifted its brand value to 20 million pounds (US$37 million).

SAIC is also involved in alternative energy vehicles under a programme approved by the Shanghai municipal government.

SAIC is planning to produce 10,000 fuel cell autos by the end of 2012.

Source: China Daily