Geely Profit Rises on Sales; Will Use Volvo Technology

Bloomberg Businessweek, August 25, 2010

Geely Automobile Holdings Co., whose parent this month completed the biggest overseas acquisition by a Chinese automaker, increased first-half profit 35 percent as car sales rose.

Net income increased to 804.8 million yuan ($118 million) or 0.0996 yuan a share, from 595.9 million yuan, or 0.0893 yuan, a year earlier, the company said today. Sales at the company, a unit of Zhejiang Geely Automobile Co., rose 55 percent to 9.24 billion yuan.

The Chinese maker of the Kingkong compact car, expects sales to meet its target of 400,000 units this year even as growth declines in the world’s largest auto market, Chairman Li Shufu said today. Auto sales in China have been rising at a slower pace since April as inflation erodes disposable incomes and government measures to cool the economy weaken demand.

Geely’s earnings were “better than our expectations”, Steve Man, a Hong Kong-based analyst with Samsung Securities (Asia) Ltd. who had forecast a 28 percent rise in profit, wrote in a note. Still, the increase in gross margins didn’t match the 40 percent production growth in the first half, Man wrote.

Car Buyers Returning

Geely closed unchanged at HK$2.61 in Hong Kong trading today. The stock has declined 39 percent this year.

Car sales growth will slow in the second half due to a higher comparative base from 2009, Geely Executive Director Lawrence Ang told reporters in Hong Kong today. Domestic and export competition is likely to intensify, he said.

Car buyers are returning after high summer temperatures kept them away from dealerships in July and August, An Conghui, Geely’s executive vice president, said at a conference in Ningbo on Aug 19. An forecasts industrywide vehicle sales in China to reach 16 million this year, with growth expected to accelerate from September to the year-end.

China’s July car sales to dealers rose at the slowest pace in 16 months. Wholesale deliveries rose 13.6 percent to 946,200 last month, compared with 19 percent growth in June, the China Association of Automobile Manufacturers said on Aug 9.

Geely sold 227,200 vehicles in China during the first seven months of 2010, 34 percent more than its 169,170 deliveries a year earlier. Sales numbers fell 11.9 percent in July, the first decline since January 2009, Samsung’s Man wrote in an August 11 report.

‘Homegrown Brand’

Zhejiang Geely, founded by Li Shufu, bought Sweden’s Volvo Cars for about $1.5 billion earlier this month, after a doubling in profit last year allowed it to expand overseas.

Geely will use some technology from Volvo in its models, although it wouldn’t make sense to use too much, Li said today.

“We cater to different consumer segments; Volvo is a global luxury brand, while Geely is a China homegrown brand and serves the mass market,” Li said. “Using too much Volvo technology in the models would make Geely cars more expensive.”

Volvo’s board hasn’t decided where to build a manufacturing base in China yet, Li said, adding that it wasn’t a near-term plan to move production to the mainland, and Volvo cars will still be produced in Europe.

“Volvo is an independent car company,” Li said. “In order for the brand to regain the glory of its days before, it has to be built where it is sold.”

Zhejiang Geely will produce Volvo’s S60 sedan at an existing plant in Chengdu, China, An said this month. The company will also set up a new plant in Chengdu to build Volvo models, he said at the time, without giving a timeframe.

Acquiring Volvo gives Geely a European luxury brand and helps “accelerate their development,” said Bill Russo, a Beijing-based senior adviser at Booz & Co. “It helps them learn how to build the skills of being a global car company, which is something every Chinese car company today is in a position of relative disadvantage.”

--Liza Lin. With assistance from Rishaad Salamat and Karolina Miziolek in Hong Kong. Editors: Kae Inoue, Terje Langeland.

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