Shanghai Electric (2727.HK) announced yesterday that it had entered into a share sale agreement on Saturday (29th) to sell all the Shanghai Diesel Engine (600841.SH) and Shanghai Diesel B Shares (900920.SH) held at a cash consideration of RMB 923 million. ) 50.32% equity to Shanghai Automotive.

The company stated that the transfer of the shares still requires the approval of the SASAC and the foreign investment approving authority, and the CSRC has exempted the full tender offer. At the beginning of September last year, Shanghai Electric announced that it will merge with Shangdian Group (600320.SH) through the share exchange system to achieve the overall listing of “A+H”. While announcing the return of the curve to the A-shares, the company also revealed in the announcement at that time that it planned to sell the shares held by Shanghai Diesel to Shanghai Automotive.

As to the reasons for the sale, Shanghai Electric stated in the announcement that although the mainland's automobile and shipbuilding industries have been developing rapidly, the performance of Shanghai Shichai Group failed to follow the growth of its peers. The slow recovery of business was mainly due to the failure of Shangchai to produce diesel engines with itself. The automotive and marine production groups work closely together. Most of the mainland diesel engine manufacturers have established relationships with auto or ship manufacturers in order to accelerate their development.

In addition, large auto and marine manufacturers in the Mainland tend to set up their own diesel engine divisions to meet the Group’s production needs. At the same time, they can enjoy the benefits of sharing costs, making it even more difficult for Shangchai to compete in the market.

The company stated that after the sale of shares, the group can focus its resources on the business with better prospects. The proceeds will be recorded in the income statement for the financial year ending in December 2008. The net proceeds from the sale are planned to be used as working capital. It is understood that Shanghai Diesel is principally engaged in the design, development, production and sale of diesel engines, diesel systems and diesel power generation equipment for the engineering, automotive, agriculture, shipbuilding and power generation industries. It is one of the major suppliers of diesel engines in the Mainland. The net profit of Shanghai Diesel's shares as of the end of December 2006 and the nine months ended September 2007 were approximately RMB 12.8 million and RMB 14.7 million, respectively.

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