Date
21 August 2017

What’s driving Jardine to invest in Zhongsheng?

What is it about mainland car dealer Zhongsheng Group Holdings Ltd. (00881.HK) that makes it so attractive to Jardine Matheson Group?

Although low-key since it changed its domicile to Bermuda in 1984, Jardine is no stranger to Hong Kong people, but its recent move into the mainland car dealership market is something of a puzzle to them.

Through Jardine Strategic Holdings, the group has invested US$722 million in Zhongsheng. It has a further HK$3.09 billion (US$398 million) worth of convertible bonds — a combined stake of 20 percent.

The time-honored British conglomerate has always been associated with such prized assets as Hongkong Land, the biggest landlord in Hong Kong’s Central business district, Dairy Farm and supermarket chain Wellcome.

In fact, Jardine has had a significant car-related investment portfolio for the longest time. It holds substantial stakes in Indonesian automaker Astra International and in India’s industrial giant Tata Group.

China, the world’s biggest vehicle market, is the future of the global auto industry and Jardine’s investment in Zhongsheng reflects that thinking.

Why it picked a dealership over a carmaker to invest in is a little unclear, but the Hong Kong Economic Journal believes the reason could be the difficulty in gauging which car brand will dominate the mainland market. A car dealer has no such constraints.

In the 1980s, American cars began to take a battering from their Japanese counterparts, leading to a new world order in the industry and confirming the disruptive nature of an ever-changing market.

Now carmakers not only have to fight for their brand image, they also face growing pressure to constantly innovate to satisfy an increasingly discerning and sophisticated market while dealing with unprecedented technological challenges. Do they go green or mean? Electric or conventional?

Investing in China’s dealership market is a surer thing, given the astonishing growth in auto sales across all brands. Last year, sales surged 15.7 percent to 17.92 million units. Carmakers rely on dealers to reach buyers.

Then there is the question of choice. Of all the major car dealers in the mainland which include Pang Da Automobile Trade (601258.CN) and China Grand Auto — both have larger networks and bigger sales — why Zhongsheng?

The answer is a combination of brand positioning, volume and reach. Toyota, for instance, accounts for two-thirds of Zhongsheng’s network of 163 dealerships across the country. Mercedes-Benz, Audi, Lexus, Porsche, Jaguar Land Rover, Chrysler and Volvo make up the rest.

Also, Zhongsheng reportedly sold one-fourth of all Mercedes-Benz cars in the country last year, making it a frontrunner in the race to capture China’s rapidly growing middle class.

Jardine subsidiary Zung Fu Co. Ltd. is the exclusive retailer of Mercedes-Benz automobiles in Hong Kong and Macau and has established a foothold in Guangdong. Analysts say Zung Fu and Zhongsheng complement each other, enabling them to make the most of each other’s dominance in luxury brands on both sides of the border. One such advantage is pricing power.

Although Zhongsheng’s network — 170 outlets as of last year — is dwarfed by Pang Da’s 800-strong, its dealerships are all strategically located in affluent coastal provinces including Zhejiang, Fujian, Jiangsu, Shandong and Liaoning, on the doorstep of emerging high-end consumers.

And in a hint of things to come, Zhongsheng said its 2013 gross profit from after-sales services surpassed that from new car sales for the first time.

– Contact the writer at [email protected]

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