Analyst Note| Ivan Su |
Brilliance China’s governance failure leading to subsidiary SJAI’s unauthorized guarantees and missing cash is highly disappointing. Brilliance’s potential cash loss of CNY 6.8 billion knocks 15% off of our fair value estimate to HKD 10.10. While the pre-suspension share price is already below our fair value estimate, we think it is too early to be confident in the full extent of the firm’s governance issues. As a result, we raise our uncertainty rating to extreme and advise that investors sit on the sidelines for the time being. Given the bankruptcy of parent Huachen, we think the story is still unfolding and a change in major shareholders or other restructure is much needed. We intend to keep our extreme uncertainty rating until there is a known long-term fix to these issues.