Brilliance plunges 30% after BMW takes over joint venture

BMW agreed to pay the Chinese automaker $4.1bn for 25% stake

American consumers don’t seem keen on big-ticket items such as new cars, which is why auto manufacturers are reducing capacity. EPA

Brilliance China Automotive sank by a record after it agreed to give BMW control of their joint venture, diminishing the Chinese carmaker’s exposure to future growth in the world’s largest auto market.

Brilliance fell as much as 30 per cent in Hong Kong trading as a slew of brokerages downgraded the automaker after BMW said on Thursday it is increasing its stake in the venture to 75 per cent from 50 per cent. The partnership accounted for most of Brilliance’s profit last year.

Citigroup cut its price target by 73 per cent and recommended selling the shares, saying the “unfair” deal will hurt the company’s earnings, while CLSA, a Hong Kong-headquartered investment group, said minority shareholders are the losers.

The agreement gives BMW a bigger say over its business in China, and lets it keep more of the earnings it generates in the massive market.

“A smaller stake in the joint venture means less earnings contribution to Brilliance China and that’s the only thing investors are sure of right now,” said Angus Chan, Shanghai-based an analyst at Bocom International, a subsidiary of Bank of Communications in Hong Kong.

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The pact shows China’s government is following through on its pledge to open up the economy to foreign ownership after the 50:50 joint-venture rule that has restricted global brands’ access to the market for decades. BMW said its deal will be completed in 2022.

BMW agreed to pay the Chinese automaker $4.1 billion for the 25 per cent stake, valuing the 50 per cent currently owned by Brilliance in the venture at $8.2bn.

Shares of Brilliance are the worst performer this year among Chinese car stocks traded in Hong Kong. Other Chinese auto stocks have also plunged amid investor concerns that the companies will be left with a smaller share of their ventures’ future earnings should their global partners increase control.

China’s policy change gives foreign carmakers such as Daimler, Volkswagen and General Motors a chance to obtain a bigger control over their businesses in China. In addition to being the world’s largest electric-car market, China is fast becoming a major development and production centre for such vehicles.