Bad Assets Sweet For Huarong, Sour For Saab Buyer
Domestic and overseas investors have been feasting on a flood of sour loans being churned out by China’s economic slowdown, mostly by buying shares in big state-run firms that try to recover money from those bad assets. In the latest wrinkle of that story, 8 major institutional buyers have spent a hefty $2.4 billion to purchase 21 percent of China Huarong Asset Management, one of the leading bad asset managers.
But bad asset management isn’t always such an easy game to play, as another group of China-backed investors is learning after their ill-advised purchase 2 years ago of insolvent Swedish car maker Saab. That group, called National Electric Vehicle Sweden AB (NEV) has declared bankruptcy, signaling an end may finally be near for the Swedish car maker that probably should have died several years ago.
Bad asset management is a tricky game, since there’s always a reason that such assets have soured and untangling those reasons and fixing the problems is a difficult job. But in the case of China, bad asset managers like Huarong and recently listed Cinda Asset Management (HKEx: 1359) have become hot tickets for investors. That’s because those companies have shown themselves quite capable of recovering a big portion of the value of soured assets that they buy from state-owned banks and other creditors.
That strong reputation has made these bad asset managers a popular bet for investors looking for an interesting alternative to traditional Chinese banks, and is what’s attracting some of the world’s leading institutional buyers to put big money into Huarong. According to the latest reports, the list of buyers who have just pumped some 14.5 billion yuan ($2.4 billion) in Huarong includes US giants Goldman Sachs (NYSE: GS) and Warburg Pincus. (English article; Chinese article) Big domestic names taking part in the fund-raising include leading insurer China Life (HKEx: HKEx: 2628; Shanghai: 601628; NYSE: LFC), and Fosun International (HKEx: 656), a top privately owned private equity firm.
The investment values Huarong at about $11.4 billion, and I expect that value could rise a bit by the time the company lists in Hong Kong, which is expected next year. By comparison, Cinda, which raised $2.5 billion in its widely subscribed IPO last December, now has a market value of nearly $6 billion.
Cinda’s shares have had a somewhat bumpy ride since that offering, rising as much as 55 percent in their first 2 months before giving back much of those gains. They now trade about 10 percent above their IPO price of HK$3.58. I expect we could see similar things for Huarong, including a strong reception for the IPO followed by bumpy upward trading as investors become more familiar with the company.
Let’s close out this post with a quick look at a bad asset that a China-led group probably wished it never purchased, with word of NEV’s bankruptcy declaration after it failed to turn around Saab. (Chinese article) NEV, whose stakeholders came from China, Japan and Sweden, was just one of several China-backed investors who were trying to purchase the sputtering Saab. The Swedish car maker was earlier jettisoned by former owner GM (NYSE: GM) as part of an own overhaul following its own bankruptcy.
Most of the prospective Chinese buyers for Saab were interested in its intellectual property, though none really understood the complexity of the company’s situation, including its very expensive cost structure. So it really comes as no surprise that NEV’s purchase has ended with a bankruptcy, which the consortium says will help it to renegotiate agreements with its creditors. The company added it currently has no cash to pay its suppliers, and I suspect this latest move is a prelude to a Saab liquidation that really should have occurred 2-3 years ago.
Bottom line: Huarong will get a positive reception for its Hong Kong IPO next year, while an unrelated bankruptcy declaration by a China-backed investor group is a prelude to the final liquidation of Saab.
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