|Shares Out. (in M):||11,027||P/E||6.5x||5.9x|
|Market Cap (in $M):||26,064||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-14,533||EBIT||0||0|
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SAIC Motor (600104 CH)
Note: Because SAIC Motor is only traded in Shanghai, this idea is limited to institutional investors. But at US$26 bn market cap and ~US$46 mm daily liquidity, this is big enough for many institutional investors.
Thesis: SAIC Motor owns 50% of the SAIC-General Motors and SAIC-Volkswagen joint ventures in China. GM and VW are very strong brands in China and SAIC Motor is #1 with ~24% market share. SAIC grew revenues 18% in 2013 and consensus expects ~9% revenue growth in each of 2014, 2015, and 2016. SAIC trades at 3.5x trailing earnings ex-net cash*, 6.5x with cash. On 3/27/2014 SAIC announced a substantially higher dividend payout than expected (50% payout ratio vs. 30% previous), representing a 16% yield ex-cash and 8% yield on current market cap.
*Cash includes ~US$2 bn held at the JV level, 50% interest. There is $14 bn cash at the parent and $2 bn debt.
This company is extremely misvalued, but it may be hard to convince you on face of the merits of a US$26 bn Chinese SOE. I will start with a quote from Buffett on why he invested in PetroChina (from the excellent site Buffettfaq.com):
“PetroChina is not opaque. It’s very similar to big oil companies elsewhere in the world. It’s the 4th most profitable oil company in the world – it produces as much crude as Exxon. It’s not complicated – it’s a big integrated oil company, so it’s fairly easy to get your mind around the economics of the business.
The annual report will tell you more about the business than [the annual reports of] other oil giants. They tell you they’ll pay out 45% of their earnings, barring the unexpected. I like knowing that that cash will come to Berkshire.
It was bought because it was very, very cheap by any metric – far cheaper than Exxon, BP, Shell... You could say it should be cheaper, given that it’s 90% owned by the government of China, which is a factor, yes, but not so big for me. If you read the annual report of PetroChina, you’ll have as good an understanding of the company as reading the annual report of any other oil company. Then, you can think about risks such as a disruption of US-China relations.
[Munger: I think if it’s cheap enough, you can afford more country risk or regulatory risk. It’s not complicated.]
There’s Yukos, the big oil company in Russia. In evaluating country risk, you can reach your own judgments. In our view, PetroChina had less risk.
[Later in the meeting, Buffett and Munger returned to the discussion of this company:]
You don’t need any blinding insights to invest in PetroChina. They’re producing 2.5% of the world’s oil, it’s priced in US dollars, they control a significant part of the refining in China, and they pay out 45% of their earnings in dividends. If you’re buying something like that at 1/3 the valuation of comparable companies, it’s not hard. You just have to do the work.
[Munger: But when you were buying, no one else was. It required uncommon sense.]”
Buffett began buying PetroChina in 2002 (first disclosed on 4/30/2003) and finished with an average cost of $22 per share (I’m using the New York ADS price) and sold in September-October 2007 for ~$160-170 per share.
PetroChina earned $3.30 per ADS in 2001 and $3.42 per ADS in 2002. Thus, Buffett’s cost of $22 represented 6.7x 2001 earnings and 6.4x 2002. PetroChina paid out half of its earnings in dividends, so Buffett was buying at a 7.5% trailing dividend yield on market cap.
On face SAIC has very similar metrics: 6.5x 2013 earnings and 8% dividend yield. However, SAIC is far cheaper on a cash-adjusted basis: adjusted for the >50% of market cap in net cash (mostly on balance sheet, but also at the JVs), SAIC trades for 3.5x 2013 earnings and 16% dividend yield. Nonetheless, Buffett was undoubtedly buying at a far better growth point in China’s economy.
The bull investment case, which would be more relevant if this were at a normal valuation
China had 71 cars per 1000 people in 2012 vs. 787 for the US—an order of magnitude difference. There are many reasons why this gap will not converge fully even with time (already-congested cities, car ownership limits) and there may be cyclical factors that depress demand (like a possible hard landing) but there is no doubt that the mature number will be materially higher than present. Even within China there is a lot of room for convergence: nearly 20% of Beijing households have a car, whereas that number for most other provinces is <5%. Buying a (foreign-brand) car signals prosperity, face, that one has made it in life. China’s car market is already the largest in the world at 22 mm total autos sold in 2013 (vs. 15.6 mm in the US). CLSA predicts an 8% CAGR through 2018.
There is a major inconsistency here—investors in VW and GM generally capitalize the Chinese JV earnings at 8-10x, not 3x. These are great assets. SAIC also owns a large chunk of its supply chain, stretching from upstream parts suppliers to financing companies to downstream aftersales service companies—a competitive advantage and a way to ensure quality in an otherwise chaotic market.
Why is SAIC Motor so cheap?
Some explanations we've heard:
Nonetheless, there's no hard catalyst that guarantees a rerating. But longer term, it's hard to see this not working out to some degree.
“The Chinese government owns 90% and we own 1.3%, so if we vote with them, together we control the business.” – Buffett, speaking about PetroChina
The Shanghai government directly and indirectly holds a 77.3% stake in SAIC Motor Stock Holding Company, the public company; the public holds 18.9%.
We had a very helpful conversation with a former executive at GM China:
“Of all SOE joint venture partners, SAIC is by far the most Western and most progressive. They run all of the operations on a pretty strict capital return basis. Their understanding of key metrics and market forces is very strong. They’re very hard on the organizations to deliver long-term financial targets they’re committed to. They make excellent decisions: if they don’t see good returns on a project, Chen Hong [President] is very disciplined about cancelling.”
“I know they pay a lot of attention to their stock, they watch the stock price very closely, it’s definitely a key measure for the government – if it’s listed and SAIC doesn’t grow with the rest of market, it’s an embarrassment. Great Wall’s performance is a bit of a marker for SAIC.”
How to trade this?
Ask major investment banks for QFII.
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