Shanghai Automotive Industry Corp (SAIC), one of the country's largest automakers, said yesterday it will buy 50.32 percent of Shanghai Diesel Engine Corp, a subsidiary of Shanghai Electric.

The deal is likely to boost SAIC's capabilities in the commercial vehicle sector, according to analysts.

SAIC inked a stock transfer deal with Shanghai Electric last Saturday, it said in a statement to the Shanghai Securities Exchange yesterday. The deal, valued at 923.4 million yuan, is based on Shanghai Diesel's net assets on September 30, it said.

Shanghai Electric will no longer hold any stake in Shanghai Diesel after the transaction. The purchase is pending approval from authorities and the regulator.

"The deal should benefit both SAIC and Shanghai Diesel," said Zhang Xin, an analyst at Guotai Jun'an Securities.

"SAIC can take a controlling stake in a major diesel engine manufacturer for much less than the cost of building a new engine manufacturing plant," he said.

The deal will also enable Hong Kong-listed Shanghai Electric to focus on its core business of equipment manufacturing, Zhang said.

Shanghai Electric said yesterday that Shanghai Diesel was facing mounting market pressure and the chances of a business recovery were slim due to its failure to work closely with major carmakers and shipbuilders in China, which have strong demand for diesel engines.

Founded in July 1947, Shanghai Diesel is a large-scale State-owned manufacturer of diesel engines, fuel-burning systems and diesel generator sets. The company employs over 4,000 staff and has net assets of 3.7 billion yuan, according to its website. The Shanghai-listed engine manufacturer suspended trading in August last year when Shanghai Electric began talks with SAIC over the Shanghai Diesel purchase.

China Business News reported yesterday that SAIC's plan is for Shanghai Diesel to focus on developing both vehicle and industrial engines, with significant enlargement in its production and sales capacity. SAIC aims to build Shanghai Diesel into the engine manufacturing base for its commercial vehicle sector to facilitate commercial vehicle production using its own patents.

Shanghai Diesel shares resumed trading in Shanghai yesterday, soaring 10.02 percent to close at 19.99 yuan.

Backed by the news, shares in SAIC jumped 1.84 percent to close at 27.17 yuan.

(China Daily January 4, 2008)