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?

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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.