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Jardine Strategic Holdings Limited Engages in Strategic Long-Term US$731m Investment

The conglomerate Jardine Strategic Holdings (SGX: J37) announced this morning that it would be acquiring up to a 20% stake in Hong Kong-listed Zhongsheng Group Holdings Limited. The total investment would cost Jardine Strategic US$731m and would see it invest in the common shares and convertible bonds of Zhongsheng Group.

According to Jardine Strategic’s press release, Zhongsheng Group “is one of mainland China’s leading motor dealership groups operating over 170 outlets in over 60 cities across 15 provinces and regions. The company carries over 15 major marques, including Mercedes-Benz, Audi, Lexus, Porsche, Jaguar and Land Rover in the luxury segment and Toyota, Nissan and Volkswagen in the mid-to-high-end segment.”

Zhongsheng Group has seen some tremendous growth over the years, likely as a result of China’s burgeoning economy. Nonetheless, the company’s profits have also declined from a peak in 2011 as China’s economy showed signs of a slowdown in growth in 2013.

2008

2011

Last 12 Months

Sales

RMB10.5b

RMB41.9b

RMB50.4b

Profits

RMB219m

RMB1.42b

RMB869m

Source: S&P Capital IQ

In any case, Jardine Strategic still feels confident in Zhongsheng Group’s future in the automobile market in China. Adam Keswick, director of Jardine Strategic, commented on the investment:

Zhongsheng is one of China’s premier motor dealership groups representing many internationally renowned marques. This long-term strategic investment provides us with a greater exposure to the Mainland market in a sector we understand and in which we feel Zhongsheng has the potential for substantial growth.”

Hunag Yi, chairman of Zhongsheng Group, added that both parties are “very excited” by the opportunities the partnership can create. Jardine Strategic, through its 73% stake in Jardine Cycle & Carriage (SGX: C07), has great experience in the automotive markets in many parts of South East Asia including Indonesia, Singapore, Malaysia, and Vietnam.

Jardine Cycle & Carriage is the 50% owner of Indonesia-listed conglomerate Astra, which is the largest automotive group in Southeast Asia. The former also has motor subsidiaries that have operations in Singapore and Malaysia under the Cycle & Carriage banner.

Jardine Cycle & Carriage’s historical corporate performance over the past decade has been stellar, with profits growing from US$185m in 2003 to US$828m in the last 12 months, which does give some clues regarding the company’s know-how within its automotive businesses.

The deal with Jardine Strategic and Zhongsheng Group would see the former purchase newly issued shares of the latter for US$332m. The number of new shares issued equate to roughly 12.5% of Zhongsheng’s current existing share-count prior to the deal.

Jardine Strategic would then pump in an additional US$399m to subscribe for Zhongsheng Group’s convertible bonds. These convertible bonds can be converted into Zhongsheng Group’s common shares (for a further 12.5% of Zhongsheng’s existing share-count) within three years of the deal and can be done so entirely at Jardine Strategic’s discretion.

All told, if Jardine Strategic eventually converts those bonds into common shares of Zhongsehng Group, the former would own 20% of the latter. This acquisition would be financed with Jardine Strategic’s “existing cash resources.”

On that front, the conglomerate’s latest balance sheet shows it carrying US$4.31b and US$11.6b worth of cash and debt respectively, so a US$731m investment would likely not unduly stretch its finances.

On a final note, this deal made by Jardine Strategic Holdings might be one that investors in Jardine Matheson Holdings (SGX: J36) would want to pay some attention to as the latter owns more than 80% of the former.

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