Xiang Torch to Build the King of China's Auto Parts
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Weichai Power's merger with Hunan Torch and the subsequent stock exchange reform are currently being discussed on Panorama Network. Investors have already submitted nearly 220 questions, and senior executives from both companies and sponsor agencies have answered about half of them. The main concerns from investors revolve around the merger plan and the future development of Weifang Diesel following the integration. Weichai Power’s Chairman, Tan Xuguang, expressed confidence, stating that if the plan is successfully implemented, the group will achieve greater synergy and strategic integration. The new company is expected to form the largest industrial cluster in key automotive components such as powertrains, transmissions, and axle systems, becoming China’s most powerful auto parts group.
Two key elements stand out in this merger proposal: the IPO combined with a share exchange. As part of the merger and equity reform, Weichai Power will issue new A-shares to all shareholders of Hunan Torch except Weichai Investment. After the merger, Hunan Torch will be dissolved, and Weichai Power will become the surviving entity, applying for listing on the Shenzhen Stock Exchange. The conversion ratio is set at 3.53:1, with Weifang Diesel shares priced at RMB 20.47 per share and Hunan Torch shares at RMB 5.80 per share. Zhuzhou State-owned Assets will distribute additional shares to tradable shareholders, with each ten shares receiving 0.35 new shares. This process will be completed simultaneously, without any phased implementation.
The second point involves the cash option. Tradable shareholders of Hunan Torch can choose to receive cash instead of shares at a price of RMB 5.05 per share. Zhuzhou State-owned Assets has pledged to forego the cash option and instead transfer its shares to Weichai Power.
After the merger, Hunan Torch’s original shareholders, excluding Weichai Investment and those who opt for cash, will become A-shareholders of Weichai Power. Weichai Investment, a subsidiary of Weichai Power, will have its shares canceled. Once the plan is fully executed, Weichai Power will become a dual-listed company, trading on both A-shares and H-shares, with full circulation in A-shares.
Investors asked why Weichai Power chose to merge with Hunan Torch and why the latter agreed. Executives explained that Weichai Power is a leading manufacturer of high-power, high-speed diesel engines, with strong growth potential. After the merger, it will possess the most valuable and profitable powertrain system in China, making it the largest auto parts manufacturer. The integration of Weichai Power and Hunan Torch will enhance the competitiveness of the heavy truck component industry chain, maximize synergies, and increase shareholder value.
Some investors questioned the share conversion price. Tan Xuguang explained that the RMB 20.47 per share price was based on recent stock performance and cautious valuations by financial institutions. It represents a roughly 10% discount compared to international bank estimates. For example, Goldman Sachs valued Weichai Power at HKD 22.1 per share, while CLSA suggested HKD 22.37, and BOC International raised its target to HKD 25. Additionally, the H-share price before suspension did not reflect the strong 2006 interim results, which exceeded market expectations.
Citic Securities’ managing director, Dedi Liren, praised the share reform as an innovative step in the Chinese capital market. He noted that Hunan Torch holds a significant position in the heavy-duty vehicle industry, especially in key components like transmissions and axles. With a market share exceeding 60% in heavy truck transmissions and over 90% in certain segments, Hunan Torch brings strong competitive advantages. If the plan succeeds, it will resolve ownership issues and allow Weichai Power to enter the A-share market, creating long-term value for all stakeholders.
Related topics: Auto Parts Giants – Hunan Torch