Privatizing CIMC Vehicles awaits verdict in duty-evasion probe

The big-rig truck trailer maker disclosed it is being investigated for circumventing extra tariffs in the U.S., but will move ahead with a plan to privatize its shares in Hong Kong

Key Takeaways:

• CIMC Vehicles disclosed it is being probed for avoiding anti-dumping tariffs and countervailing duties in the U.S., which has become one of its most important markets
• The company’s more than 6 billion yuan in cash at the end of last June is more than sufficient to finance its previously announced privatization plan

By Ken Lo

A privatization killer or just a minor bump in the road?

That’s the big question for CIMC Vehicles (Group) Co. Ltd. (301039.SZ; 1839.HK), which disclosed last week that it’s being investigated for evading anti-dumping tariffs and countervailing duties in the U.S. It said release of the results of the investigation has been delayed from Feb. 18 until around two months later. A guilty verdict, and potentially big resulting penalty, would put CIMC Vehicles in an awkward position as it tries to move ahead with its previously announced plan to privatize its Hong Kong-listed shares.

The case involves a complaint from December 2022 accusing CIMC Vehicles of evading U.S. anti-dumping and countervailing duties by transshipping Chinese-made chassis and their subassemblies through Thailand before sending them on to their ultimate destination in the U.S.

Any extra tariffs on the company’s container trailers and other components, once confirmed by the U.S. government, would push up the company’s cost of exporting those trailers to the U.S. from China, bringing down its gross margins. The company might be forced to shift some or all of the additional costs its customers, making its products less competitive.

The additional tariffs the company might face are part of a steady stream of such extra duties imposed by the U.S on various Chinese goods dating back to 2018. That trend prompted many Chinese exporters to transship their U.S.-bound goods through third countries to avoid such tariffs. But such a strategy also raises the risk of being accused of circumventing tariffs targeted at Chinese goods, including anti-dumping tariffs and countervailing duties.

Astronomical fines

According to the World Trade Organization (WTO), anti-dumping duties can vary widely to as high as 550% of the invoiced amount of goods. Countervailing duties are more complicated, as they involve estimated damages caused to the related industries in the country imposing the duties. 

In May 2023, the U.S. government announced it had uncovered a scheme by Chinese businessmen to evade duties by illegally transshipping merchandise to Puerto Rico via Malaysia, and issued a duty penalty of about 718% of the invoiced amount of the goods. CIMC Vehicles probably wouldn’t be punished so severely, but the ongoing investigation into one of China’s leading truck trailer makers will definitely be closely watched by Chinese enterprises.

So, what impact will the investigations have on CIMC Vehicles’ operations and finances? An earlier similar case against the company from 2020 provides some clues.

In the earlier case, discussed by CIMC Vehicles in a 2020 announcement, the company said its truck trailer sales to the U.S. affected by duty-evasion claims were worth 7.24 billion yuan ($1 billion) in the three and a half years starting from 2017 through the first half of 2020, yielding a gross profit of 1.83 billion yuan over that time. But those sales dropped steadily from 20.6% of the company’s gross profit in 2017 to just 6.4% in the first half of 2020.

CIMC Vehicles changed its strategy after 2021 by opening production facilities for its trailers in the U.S. That strategy not only helped to tamp down the duty-evading noise, but also boosted the company’s gross margin for its refrigerated semi-trailers sold in the U.S. Good performance for its products sold under well-known brands like Vanguard and CIE lifted its revenue and profit contributed from North America past those from its home China market.

North America as new money spinner

The company’s interim results for 2023 show that revenue from North America rose 34.7% year-on-year to 6.23 billion yuan in the first half of last year, higher than 4.24 billion yuan from sales to buyers in China. Gross margin for its North American operation also improved to 28%, better than the 9.08% margin for China and 14.4% for Europe. The strong North American performance was mainly the result of a price increase and sharp declines in ocean shipping rates, as well as a strong U.S. dollar in the first half of the year.

The company’s North America business also benefited from a supply shortage in the local semi-trailer market. As that eased, growth momentum in that market slowed in the second half of the year. The strong gains led the company to announce last month it expected to report a net profit of 2.4 billion yuan and 2.48 billion yuan for all 2023, up 115% to 122% from 2022. But the profit for the second half of the year dropped to between 501 million yuan and 581 million yuan from the 1.9 billion yuan profit in the first half.

On Nov. 29 last year, CIMC Vehicles’ board approved a proposal to privatize the company by buying back all of its shares traded on the Hong Kong Stock Exchange. Preliminary preparatory work for that buyback has been done, with an indicative offer price of HK$7 per share. The buyback would cost around HK$1 billion ($128 million) if all shareholders accept the offer in full. After that the company’s shares would no longer trade in Hong Kong, but its domestic A-shares would continue trading on the Shenzhen Stock Exchange.

CIMC Vehicles’ shares have traded close to the privatization price of HK$7 since announcement of the privatization plan. But the stock has been far more volatile on the A-share market in Shenzhen, falling to recent levels around 9.2 yuan after reaching nearly 11 yuan shortly after the Hong Kong privatization plan was announced last year.

CIMC Vehicles held cash and equivalents of about 6 billion yuan at the end of June, and borrowings of only 731 million yuan, implying it has plenty of cash to finance the buyout on its own. Add to that its strong profits from last year, and the company should be able to easily handle the privatization with its own resources.

With North America now the company’s biggest revenue and profit engine, CIMC Vehicle is certain to stay on top of the investigation and cooperate. We’ll need to wait for a verdict to see how much it could be penalized, which will create some uncertainties for its finances. But at the end of the day, the company’s strong finances mean that any outcome could delay, but is unlikely to scupper, the privatization bid.

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