Available for Sale Investments

Looking at my firm's Balance Sheet I found that most items made sense -  certainly going through the relevant notes also helped.

But one item has left me confused! 

I was interested to find out what “Available-for-sale investments” were? They appeared in the non-current assets column.

After reading the relevant note (Note 20), this item is basically an Investment that was owned by NCGA Holdings Limited, a company acquired by Boaxin.

Note 20 reads as follows:

"The Company acquired NCGA Holdings Limited… on 1/12/12. The NCGA Group held a 26% ownership interest if Qingdao Motors (H.K) Ltd and agreed not to exercise its 26% voting power. The investment was classified as an available-for-sale investment accordingly.

The available-for-sale investment was stated at cost less impairment because the investment does not have a quoted market price in an active market and the directors are of the opinion that the fair value cannot be measured reliably. The Group does not have the intention to dispose of it in the near future."

After reading that, I’m just more confused! I thought that it must have been an investment left over from the acquisition of NCGA that Boaxin didn’t want to keep, so they were looking for a buyer for it. But in the note it says the Group does not have the intention to dispose of it in the near future? So why is it available for sale?

Investigation of Baoxin's purchase of NCGA

I wanted to find a little more relating to Baoxin's purchase of NCGA.

I've just found the media release regarding Baoxin's purchase of NCGA.

Here is a hyperlink to the announcement, which occurred on August 30th 2012.

http://www.autonews.com/article/20120830/GLOBAL03/120839993/china-baoxin-auto-to-buy-ncga-dealership-group-for-$305-million


Very interesting to then check out the share price history. For the previous 2 months to the announcement the share price plummeted, and whilst some volatility is evident, the prices have recovered reasonably since.

I would speculate that the reason for the plummet prior to the purchase may be due to speculation and uncertainty in the market due to market knowledge of the upcoming merger.  

I'd go on further to guess that the reason the share prices were so negatively affected is that generally when there is speculation of a merger or a merger is being planned, if it then doesn't come into fruition this generally affects share prices negatively for some time.

Also, by purely looking at the recovery of the share prices since the take-over, I'd suggest this adds some substance to the proof that the take-over has been successful as the share price has stabilised since the merger.

However, after writing all this I have managed to completely confuse myself. The Company only acquired NCGA on 1 December 2012, therefore I believe that the 30th August 2012 announcement would have been the first public notification of the merger. I believe that no-one would have had knowledge prior to that as the information would have been kept confidential due to the commercial sensitiveness. Also, this would mean that the share prices should have been negatively affected between the announcement (30th August 2012) and the take-over (1 December 2012) but this is not the case. So my observation all depends on whether the market was aware of an upcoming acquisition prior to 30th August 2012. If it didn't then my speculations are just useless rubbish. :)

On a separate note, obviously market growth is a strong contributor to the stabilisation of their share price since the take over but I also wonder if this partially answers my question about the Severances given to previous NCGA employees - if the company now has the right amount of man-power for growth, but not so much to burden the administrative costs then getting that balance right would also certainly improve the prospects of the financials for the firm.

Key Concepts of Baoxin Auto Group and Questions (KCQ's)

After sitting down and reading through Baoxin Auto Group's Annual Report for 2013 I have developed a bit of an overview of the company and my view of some key concepts of Baoxin Auto Group as well as some questions I have so far.


WHAT DOES BAOXIN AUTO GROUP DO?

Baoxin Auto Group holds the leading position in the luxury and ultra-luxury dealership market in China (According to them.)

Their key business consists of:
- 91 Automobile Dealership Stores (Car Sales)
- After-sales service, Used Car dealerships, financing and insurance directly relating to the sales of cars in their dealership stores


WHAT ARE THE MOST IMPORTANT / CRITICAL ELEMENTS TO BAOXIN AUTO GROUP'S BUSINESS?

- The locations of their Automobile Dealership Stores are critical to their success (Ensuring that they cover popular and affluent regions - basically making sure they reach their target customer base and have them walking into their stores)

- Having strategic relationships with the Global Leading Luxury & Ultra-Luxury automobile manufacturers - basically ensuring they can have the right cars to sell to their customers.

- After-sales & retaining their customers - ensuring they bring their car back to Baoxin for servicing etc.

- Further developing the business in the area of "Pre-Owned" Vehicles as this market is in earlier stages in China compared to the rest of the world and has the potential to really "Take off."


WHAT ARE THE KEY CHALLENGES FACING BAOXIN AUTO GROUP'S ONGOING SUCCESS?

a) The new luxury car industry is, and always has been cyclical. It is highly dependent upon the stability of the macro economy.

b) The integration of the NCGA Group (recently taken over by Baoxin)

c) Volatility in the market


WHAT ARE BAOXIN AUTO GROUP DOING TO MEET THE ABOVE CHALLENGES?

Obviously, just looking at their financials, Baoxin are certainly currently successful in meeting their challenges. Their revenue is up 66% on the previous year and Gross Profit is substantially higher (From 1,583 RMB Million in 2012 to 2,920 RMB Million in 2013)

They are individually focussing on the challenges I listed in the questions above in the following ways:

a) Baoxin are heavily focussed on developing their after-sales service. This area is more resistant to change then car sales themselves due to the simple fact that there is stability and predictability in owner's requiring their cars to be serviced. Generally, in the luxury market this is a key money maker because owners of luxury vehicles have more discernment for quality and want to keep their cars in a better condition, meaning they will often always have their dealer service their vehicle. Even if sales are down, generally car servicing will continue to provide steady revenue as cars need to be serviced.

b) Baoxin have fully integrated NCGA into their business by reducing the operating, administration and financial expenses after carefully analysing and collating the cost structure and expenditure items - basically streamlining their business and ensuring that they have cleared idle assets and resources that are not required.

c) Baoxin acknowledge the volatility in the market and have continued to improve their inventory management system to ensure that the business does not over-capitalise on inventory and to ensure supply and demand is constantly monitored. They also use inventory level statistics as performance criteria to measure their employees success.


KEY QUESTIONS I HAVE SO FAR:

1) The very first thing I noticed is that Baoxin Auto Group is incorporated in the Cayman Islands. This raised a number of questions for me including:

- Does the company lack the confidence in their very own Government to have their company listed locally in China? 

- Does this negatively affect the reputation of the Company because they are trying to minimise the regulation placed upon them?

- Is the company minimising tax by registering in the Cayman Islands - is this common practice being registered offshore or is it quite normal?

- Could it be simply considered a good move for them because it is minimising cost?

2) My firm's annual report doesn't seem to mention any HSE performance. In my opinion and experience to date, it is of utmost importance for firms to be accountable for safety and environmental performance. Is this something that would normally be discussed in an Annual Report?

3) What are Baoxin doing for the wider world in terms of sustainability? Is this something normally appearing in Annual Reports (EG do they sponsor events, contribute to improving the road toll through education & training, do they have any environmental targets?)

4) What is Purchase Restrictions Policy (P9 of my AGM Para 3)?

5) What does this mean: "Regarding luxury automobile market, the major customers group of luxury automobiles has shifted from ultra-high net worth class in the past to middle and upper classes." (P.9 of Baoxin Annual Report Para 3)

6) Sometime during the past 12 months, Baoxin has taken over a company called the NCGA Group. This raises a few questions such as:

- How successful was the take-over REALLY? Does the Annual Report accurately reflect this?

- The Annual Report includes "Severances due to the take-over of NCGA Group" as a significant reason for administrative costs in 2013. Did Baoxin do a good enough job of making sure that these severances were unavoidable? Could the workers have been "re-homed" within Baoxin?

--------------------------------------------------------------------------------------------------------------------------

I will continue to further investigate these questions and discuss with others to hopefully provide some insight and also continue to develop more questions, as well as my ultimate understanding of Baoxin Auto Group and what their financial statements have to tell us.

Study Guide Chapter 1: Question 1-2 - Boaxin Auto Group Assets, Liabilities and Equity

At year end December 31, 2013 an example of some of Boaxin Auto Group's key Assets, Liabilities and Equity is as follows noting that figures used are RMB 000's:

Assets

1) Inventory = RMB 3,002,286:

This covers mainly vehicles in stock for sale, or expected to be listed for sale to the value of RMB 2,694,793.

It also includes Spare Parts currently in stock to be sold in future to customers to the value of RMB 307,493.

2) Prepayments, deposits and other receivables = RMB 4,168,968:

This covers items such as prepayments to suppliers for future deliverables, rebates, recoverable VAT and Staff Loans.

3) Cash and Cash Equivalents = RMB 2,020,926:

This is fairly straight forward - basically what Boaxin has in cash, bank balances, short term deposits etc - totalling RMB 2,020,926.

Liabilities

1) Bank Loans and other borrowings = RMB 5,857,684:

Again a fairly straight forward item - the amount of borrowings owed by the firm.

2) Trade and Bills payable = RMB 4,364,349:

Basically the costs of doing business - lease of buildings, paying normal bills like electricity, marketing, advertising etc.

3) Income tax payable = RMB 340,055:

Company tax payable to the government,

Equity

1) Share Capital = RMB 20,836:

This is the current value of listed shares in Baoxin Auto Group.

2) Proposed Final Dividend = RMB 303,885:

The dividend for the year per share which is subject to the approval of the Company's shareholders at the AGM (Annual General Meeting)


3) Reserves = RMB 4,345,395:

My understanding of Reserves is that they are a bit like a sinking fund. Boaxin's explanation of its reserves is as follows:

1. (i)  Statutory reserve
   Pursuant to the relevant PRC rules and regulations, those PRC subsidiaries which are domestic enterprises in the PRC are required to transfer no less than 10% of their profits after taxation, as determined under PRC accounting regulations, to the statutory reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before the distribution of a dividend to shareholders.
   
2. (ii)  Merger reserve
   The merger reserve of the Group represents the capital contributions from the equity holders of the Company and the excess of the consideration over the carrying amount of the non-controlling interests acquired. The additions during the year represent the injection of additional paid-up capital by the equity holders of the subsidiaries to the respective companies, which were consolidated from the earliest date presented or since the date when the subsidiaries and/or businesses first came under the common control of the Controlling Shareholder. The deductions during the year represent the decrease in the Group’s net assets resulted from distribution to equity holders of the Company, acquisition of equity interests in subsidiaries from the Controlling Shareholder for business combination under common control and the excess of the consideration over the carrying amount of the non-controlling interests acquired.
   
3. (iii)  Exchange fluctuation reserve
   The exchange fluctuation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. 
   

My Firm - Baoxin Auto

I've been assigned an interesting company for my assignment called Baoxin Auto.

Baoxin Auto Group Limited (HK1293) is an automobile sales and service group which focuses on mid-and-high end brands as well as luxury and ultra-luxury brands. Baoxin is the largest dealer of BMW both in China and in the world. Its operation has covered 18 brands with its stores mainly located in populous and affluent regions that show enormous market potential. Due to numerous years of efforts, Baoxin Group completed its IPO on the main board of Hong Kong Stock Exchange on Dec 14, 2011 and has been ranked one of the “top ten Chinese auto sales and service groups” and “most influential auto dealer groups”, an “outstanding contributor to Shanghai auto sales and service industry”, a “five-star company of trustworthy services” as well as the 7th on the “Chinese automobile dealer group ranking list of 2012”. In particular, it has been ranked one of the “Reputable auto sales companies” and “Shanghai established brands” for consecutive years.

As an authorized dealer of premium brand automobiles, Baoxin Group provides customers of multi brands with world-class sales and after-sales services. Baoxin has made it its operating principle to comprehensively serve its customers’ needs and achieve customer satisfaction. Drawing on its group-based advantages, Baoxin realizes constant competitiveness enhancement.

In an ever changing market, Baoxin Group with its unique corporate philosophy, has been concentrating on automobile business and committed to professional services, establishing and maintaining a well-respected brand ever since its first day in the automobile industry. The Group provides integrated and comprehensive services including new car sales, after-sales maintenance, auto beauty, retrofitting, used car sales, auto insurance, auto parts and related-product sales, etc.

On its mission of “customer commitment, management optimization and supreme services”, Baoxin Group holds dear the values of integrity, practicality and constant enhancement, providing supreme services. Meanwhile, Baoxin never forgets its social responsibilities. As a reputable company, it keeps giving back to the community by proactively engaging in activities that support disadvantaged groups, which contributes to its social credibility.

Here is their website.
http://www.klbaoxin.com/html/about_profile.php

A very brief snapshot of me... Ben!

Might as well start with just a tiny bit about me... in PICTURES:

My favourite things in life are:

1) My Partner Jack (see below)

2) Travelling (Jack and I are on Safari!)

and 

3) Cooking (A cake I made for my cousin's 21st at the weekend)