Brilliance: Capital Injection to Troubled Minibus JV Another Blow to Its Capital Allocation

No-moat Brilliance 01114 announced a proposed capital contribution of up to CNY 1.36 billion in cash to the loss-making minibus operation Renault Brilliance Jinbei Automotive Co, or RBJAC, by its wholly owned subsidiary. The proposed plan, as part of the restructuring of the deeply troubled RBJAC, is still subject to court approval. Together with the disappointment over the absence of special dividend payout in March following the disposal of its 25% stake in Brilliance BMW Automotive, or BBA, the market is likely to have increased concerns on management’s intention for the use of its CNY 28 billion cash on hand. We view the event as a negative surprise and setback when investors are trying to rebuild confidence in the company’s management, and in this case, its capital allocation priorities.

If the RBJAC restructuring plan is approved by court, Brilliance will effectively own 81.36% of RBJAC and regain control of the minibus operation—which means the company will consolidate the financials of loss-making RBJAC again. To recap, Brilliance deconsolidated RBJAC in January 2022 due to loss of control over the business because of RBJAC’s restructuring. According to the latest announcement, RBJAC recorded CNY 1.4 billion after-tax loss last year under Chinese accounting standards, with net asset value of negative CNY 2.4 billion.

We maintain our fair value estimate of HKD 3.10 on Brilliance and will review the financial impact once the capital injection plan is finalized. Our fair value estimate already removes the cash generated from the disposal of the 25% stake in BBA as we feel the cash is unlikely to be returned to shareholders. Despite CNY 28 billion cash on hand and limited capital needs, we doubt the company will pay this out as dividends or be able to generate reasonable returns through investing in the automobile value chain as it claims.