The Big Three's "Heroment Resentment" Has Intensified

A change in the ownership of a listed company has finally brought to light the long-standing tensions between two of China's leading heavy-duty truck manufacturers. The recent developments have exposed the deep-seated rivalries that have simmered beneath the surface for years. Last Friday, in an effort to ease investor concerns, Wei Xuan, chairman of Weichai Power (2338.HK), which is currently facing internal and external challenges, publicly stated after a meeting in Hong Kong that the company had no intention of raising funds on the A-share market. He also denied any plans to spin off the Hunan Torch business. The "marriage" of M&A At the time when Tan Xuguang made these remarks, it had been exactly one year and one month since Weichai Power acquired Hunan Torch. Back then, Weichai’s stock was trading at 30 Hong Kong dollars, but by last Friday, it had dropped to 19. Analysts suggest that the decline in stock price was mainly due to investor skepticism over the merger. Domestic and international investment banks, led by China Gold, released critical reports that triggered a wave of selling. In mid-January 2006, a research report from Tian Jindong, a China-based gold analyst, circulated widely in the market. Titled “Weichai is Probably Going to Lose Its Largest Customer,” the report suggested that Weichai might lose its biggest client, Sinotruk (000951.SZ), in 2006. As a result, the analyst reduced his engine sales forecasts for Weichai by 2% for 2005 and 18% for 2006. Following the report, Weichai Power lost HK$528 million in market value after its stock price plummeted on January 13. Mergers and Acquisitions Triggered by Family Rivalry Soon after, Morgan Stanley and Goldman Sachs also issued reports that weighed on Weichai’s stock price. One analyst noted that this series of events was not a coincidence. According to him, China Gold is a key partner of Sinotruk, serving as both its share reform sponsor and the underwriter of its overseas listings. “During the share reform news conference, Hunan Torch disclosed the tension with Weichai. At that time, Sinotruk’s sponsors released unfavorable reports, which was quite telling,” the analyst said. It is well known that the relationship between Weichai Power and China National Heavy Duty Truck Group (CNHTC) has been tense for a long time. Before their official split in March 2006, Weichai was a subsidiary of CNHTC. From an equity perspective, Weichai was considered the “sun” company of CNHTC. “It’s no secret that there has been a long-standing rivalry between Tan Xuguang, the head of Weichai Power, and Ma Chunji, the family of CNHTC,” said someone familiar with the matter. Deep-Rooted Resentment According to insiders, the conflict between Tan Xuguang and Ma Chunji began as early as two years prior. In March 2004, after Weichai Power successfully listed in Hong Kong, Tan’s desire for independence grew stronger. While Ma aimed to use both Sinotruk and Weichai to build a full industrial chain, Tan was unwilling to be controlled and sought autonomy. Another key reason for their falling out was Tan’s plan to implement an MBO (Management Buyout). This ambition led to further friction when CNHTC tried to use Weichai’s “shell” for an overall listing in Hong Kong in early 2005, which Tan rejected. The tensions escalated further when Tan acquired Hunan Torch in August 2005 through his subsidiary Weichai Investment, gaining control over Shaanxi Heavy Duty Truck, a major competitor of CNHTC. “Shanxi CNHTC and Sinotruk were once one company, later reorganized into three parts: Jinan, Shaanxi, and Chongqing Heavy Duty Truck. Since then, they became competitors,” explained Zhang Hongji, a veteran in the securities industry. Before acquiring Hunan Torch, Weichai had not received approval from CNHTC. When Tan secretly acquired the company and took control of Shaanxi Heavy Duty Truck, CNHTC reacted strongly. This move directly led to the eventual breakdown of relations between the two sides. According to statistics, in January 2006, CNHTC stopped purchasing engines from Weichai, marking the end of their partnership. On March 20, 2006, the Shandong State-owned Assets Supervision and Administration Commission officially announced the separation of the two companies. Financial Struggles After Independence “Independence comes at a cost,” Zhang Hongji noted. Weichai Power, now separated from CNHTC, is now facing severe financial pressure. Firstly, before becoming independent, more than 40% of Weichai’s contracts came from CNHTC, creating a sales dilemma. Additionally, the acquisition of Hunan Torch required a significant investment. For a 28.12% stake in Hunan Torch (000549), Weichai paid 620 million yuan, and also purchased Xinjiang Delong with a book value of over 400 million yuan in bonds, totaling around 1.023 billion yuan. This single investment alone accounted for most of the HK$1.05 billion raised in Weichai’s 2004 Hong Kong IPO. Moreover, Tan’s engine park project, which he had heavily invested in, did not perform as expected, leading to construction fund shortages and legal issues. Zhang also mentioned that Tan’s indirect control over Shaanxi Heavy Gas could help restore Weichai’s independence, but local authorities in Shaanxi are wary of foreign capital taking control of their key enterprises. This remains a major concern for Tan.

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