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HONG KONG, Sept 19 (Reuters) - Guorun Holdings Ltd , a Hong Kong investment firm, said on Friday it will spend 450 million yuan (US$54.3 million) to expand an auto-making joint venture with China's Geely Group to profit from a booming car market.
The investment will be funded through a new share issue, but the deal is not the reverse takeover and back-door listing for Geely that some investors had hoped for. Guorun shares have risen 88 percent over the last year on those hopes.
The company said in a statement Geely has agreed to transfer car production assets to the joint venture, including an engine and gearbox production facility worth 150 million yuan and the design patents to Geely's Beauty Leopard sedan car, which is due to go into production in October.
Guorun would issue 680 million new shares at HK$0.70 each in a placement to investors to raise HK$476 million. The placement represents 16.5 percent of the expanded number of total shares.
Geely, China's only privately-held car maker, told Reuters last year it plans to list on overseas and domestic share markets within two years and it would consider a back-door listing through existing publicly traded companies.
Guorun fell 7.69 percent to HK$0.72 on Friday morning, but held above the placement price. The stock resumed trade after a suspension on Thursday pending the announcement.
"(Geely) It wants to expand its capital and asset base. A listing would be a good way to raise long-term capital," said Peter So, head of China research at ING Financial Markets.
Geely, which makes small, cheap passenger cars, will spend 300 million yuan to buy nearly 30 percent of a domestic-listed firm for a back door listing, according to Chinese state newspapers in June.
Guorun also said it has the right to expand the total investment of the joint venture from 200 million yuan to 1.5 billion yuan within two years of establishing the joint venture in April.
"It is the intention of the company to expand the joint venture company as soon as possible to seize the vast development opportunities of the PRC automobile market," it said.
Geely ranks as a relatively small player in China's booming car market. Total Chinese car production doubled to 903,400 in the first half of 2003 and is on track to hit two million for the year.
After the transactions, Proper Glory Holding Inc will remain the controlling shareholder of Guorun with its interest being diluted to 60.68 percent from 72.67 percent.
($1=8.28 yuan)