The Hunan Torch A recently announced a share reform plan, which deviated from earlier market speculation that primarily involved warrants. Instead, Weichai Power opted for a share exchange strategy, indirectly acquiring shares of Hunan Torch A on the A-share market, using this as the basis for the share reform price. In this merger by share absorption, Weifang Diesel’s share price was set at RMB 20.47 per share, while Hunan Torch A’s conversion price was RMB 5.80 per share, with a conversion ratio of 3.53:1. This approach exceeded market expectations and is expected to significantly reshape the competitive dynamics in the heavy truck industry once implemented.
Commentary highlights that Zhuzhou State-owned Assets will issue shares to all tradable shareholders, offering 0.35 shares for every 10 shares held. A total of 20.95 million shares were distributed, with Zhuzhou State-owned Assets contributing 53.45 million shares, converted into 15.14 million Weichai Power A-shares at the same 3.53:1 ratio. The total number of tradable shares received by shareholders reached 619.56 million, with 175.51 million Weichai Power A-shares replaced accordingly. To protect small and medium investors, third-party distributors provided cash options, allowing Hunan Torch A shareholders to sell their shares at 5.05 yuan per share. Zhuzhou pledged to forgo any cash options.
The share swap essentially converted non-tradable shares into tradable ones, with each 10 tradable shares receiving 2.07 shares of the company. Although the market value appreciation of Hunan Torch A’s tradable shareholders was lower than the set price, analysts predict that following the successful implementation, Weichai Power’s EPS for 2006 could reach RMB 1.37, valued at a 15x P/E ratio, resulting in a reasonable price of around RMB 20.59 per share.
Originally holding 598.61 million shares of Hunan Torch A at a closing price of 5.05 yuan, the total market value stood at 3,022.98 million yuan. Post-reform, these shareholders would hold 175.51 million Weichai Power shares, valued at RMB 20.47 per share, totaling 3,592.69 million yuan—a premium of 18.85%, slightly below the 2.07 ratio outlined in the announcement.
Weichai Power stands to gain the most from this transaction. As the original major shareholder of Hunan Torch A, it has now indirectly listed on the A-shares. Over the next 36 months, its tradable shares will represent 75.7% of the company, shifting its focus from H-shares to the A-share market. With an acquisition cost of 4,926.06 million yuan, including the previous purchase of 282.8% of Hunan Torch, Weichai Power has gained control over key assets such as Shaanxi Heavy Duty Truck, Fast Gear, and Hande Axle—assets that are highly coveted by competitors.
This move marks a significant milestone in the integration of heavy truck components and vehicle production. Shaanxi Heavy Duty Truck, part of this acquisition, saw a 76% increase in sales from January to July 2006, reaching 18,617 units. Its market share rose to 11%, placing it fourth after Dongfeng, FAW, and Sinotruk. With a current capacity of 50,000–80,000 units annually, and new facilities expected to boost output to 30,000 units per year, the company aims to reach 50,000 units in 2007.
The rapid growth of Shaanxi Heavy Duty Truck reduces the risk of order shortages for Weichai and other partners. Fast Gear dominates over 80% of the domestic heavy-duty transmission market, forming a powerful synergy among Weichai, Fast, Shaanxi Auto, and Hande Axle. Integration of marketing networks is already underway, and as Shaanxi Auto reaches its 2007 target, the landscape of China’s heavy truck industry will likely shift dramatically. While the exact outcome remains uncertain, the industry is poised for intense competition in the near future.
Related topics: Assembling: Auto Parts Giants Hunan Torch
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