Shanghai Automotive is on a roll. First it takes overall control of its vastly profitable joint venture with General Motors, and now it is likely to post a staggering 900% rise in profits for 2009.
According to a filing with the Shanghai Stock Exchange, SAIC reckons that a 57% jump in vehicle sales to 2.72 million units a year has resulted in the enormous profit rise.
In 2008, SAIC made profits of just 656.17 million yuan ($96.1 million) because it took a hit on its disastrous investment in Ssangyong, the Korean car firm, and because of the financial crisis.
Nevertheless, a 2009 profit of close to a billion dollars is a remarkable turnaround, and it was surprising that the company’s share price has fallen since the announcement by around 4-5% to 24.12 yuan. Do investors know something that the rest of us don’t?
There’s no doubt that sales have been good this year, but perhaps the rocketing profits have something to do with accounting. Until GM ceded SAIC control of the joint venture, SAIC was unable to consolidate those profits onto its main balance sheet because of a quirk in Chinese accounting law.
By purchasing a one percent stake from GM, SAIC’s balance sheet suddenly looks much more impressive. And of course pushes the company further towards the Chinese government’s stated ambition of becoming a Fortune 500 firm.