The brilliance of Brilliance

Capital at risk.

The joint venture of Brilliance and BMW

Brilliance China Automotive is a state-owned automotive manufacturer, perhaps known more for being the first Chinese company to list on the New York Stock Exchange in 1992 than for its automotive products in those early days. It was first bought for Emerging Markets portfolios in 2015. The core investment case was built around a key asset: a 50-50 joint venture with BMW in China, which began in 2003 and has since been renewed till 2040. It made sense to own the fastest growing part of one of the most respected luxury car makers in a market with huge potential.

However, in March 2021, Brilliance’s shares were suspended. Legal proceedings surrounding unauthorised guarantees by a subsidiary to its parent prevented the company from publishing annual accounts. A resultant lack of disclosure, the limited visibility as to a resolution and the possibility that the company could be delisted made for a challenging period. That suspension lasted over 18 months, during which the holding was valued at a 75 per cent discount to its last traded price. The large discount was reflective of governance concerns, the real risk that Brilliance would choose to waste its newfound wealth rather than return it to shareholders, and the possibility that the shares would be delisted. ESG ratings were definitely not complimentary.  

While the shares were suspended, a change in foreign ownership regulations in China allowed BMW to raise its stake in the joint venture to 75 per cent by paying $4.1bn to Brilliance. At our valuation price, the company was being valued at a significant discount to the value of the cash received for its 25 per cent stake in the JV, let alone reflecting the value of the continuing operations of their remaining 25 per cent.

Laying the groundwork for recovery

Through the lengthy period of suspension, we wrote to the Company and its Board several times seeking clarification of the type and scale of the issues, what investigations were being undertaken and what remedial steps were being proposed. After some delay, the company began to address the issues raised but remained suspended on the Hong Kong Stock Exchange. Aiming to ward off the risk of Brilliance being delisted, we contacted the Exchange and queried why it remained suspended, given the company’s corrective actions. This seemingly played a small part in allowing Brilliance to relist in October 2022 with a reconstituted Board, half of which is now independent. As a result, Brilliance is now paying out the proceeds of its sale of 25 per cent of the BMW joint venture to shareholders in a series of special dividends. The share price has responded very positively.

It would have been easy to have sold the company as soon as possible upon its relisting, with much relief. With the shares bouncing back from the 75 per cent haircut we’d used when suspended, it would have been easier to move on from the holding, leaving behind the need to justify the challenging governance history. But, the financial possibilities pointed to an asymmetry of returns. Management and governance had changed. The auditors and stock exchange would be watching like hawks and the company was being valued at a fraction of its cash, let alone any future earnings from the joint venture, which continues to perform well.

Despite the Chairman saying they would distribute most of its current cash if it couldn’t find suitable investments related to the auto business, previous governance challenges led to a degree of scepticism in management’s capital discipline. As such, the recent special dividend announcement is a strong signal of the company’s focus on returning excess capital to shareholders. That question has now been answered and, in doing so, strengthens the argument that the company will continue to pay special dividends from its recurring investment income from the Brilliance-BMW automotive JV.

Having been somewhat of a ‘special situation’ in recent years, fundamentals should now drive returns from here, with the focus turning to the value of their 25 per cent stake in the BMW-Brilliance joint venture. At the time of writing, our pens were out to reassess the case for doubling from here. After distributing the planned special dividends, the company will still have approximately HK$1.1/share in cash, with the joint venture expected to distribute an additional €4bn dividends to its two shareholders in 2024 (based on 2023 earnings), which would translate into another HK$1.5/share for Brilliance based on the 25 per cent holding. The company is currently valued at $5.5bn market cap and is expected to have 30 per cent of that in cash by the year end. The case then rests on how BMW is likely to do in China in the coming years. The jury is currently deliberating.

Risk factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in August 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for profit and loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

Important information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

Financial intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.

Europe

Baillie Gifford Investment Management (Europe) Ltd (BGE) is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. BGE also has regulatory permissions to perform Individual Portfolio Management activities. BGE provides investment management and advisory services to European (excluding UK) segregated clients. BGE has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. BGE is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

Hong Kong

Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713–2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

Japan

Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

Australia

Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”).  Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client.  In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.

This material contains general information only.  It does not take into account any person’s objectives, financial situation or needs.

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission (‘OSC’). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

Israel

Baillie Gifford Overseas Limited is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.

115234 10049494