(Reuters) - BYD Co Ltd (1211.HK) (002594.SZ), a Chinese carmaker backed by billionaire Warren Buffett, reported an 89 percent plunge in first-half net income as government policy changes hurt its auto sales.
The outlook for Chinese auto companies for the rest of 2011 remains unclear after Beijing stripped away tax incentives for small cars at the end of last year, helping to take the world's largest auto market off the boil.
BYD said it expected a 85-95 percent drop in its net income in the first nine months, while Great Wall Motor Co Ltd (2333.HK), China's top maker of sports utility vehicles, said earlier on Monday it will miss its sales target this year.
"The challenge facing BYD is more than a market slowdown. BYD had been expanding too fast in the past years and it will take time to make the necessary adjustments in its strategy," said Zhang Yu, an analyst at AJ Securities.
In a stock exchange filing on Monday, BYD said profit margins for its battery, cell phone parts and assembly businesses have also fallen due to competition and higher costs.
BYD, 10 percent owned by Buffett's Berkshire Hathaway (BRKa.N), delivered 259,915 vehicles during the period, down 19.3 percent from a year earlier. Sales fell 16.8 percent to 27,496 units in July, official data showed.
Xia Zhibin, head of the company's sales unit, resigned earlier in the month, citing personal reasons. Analysts said slumping sales were likely to have played a part in the move.
BYD reported a first-half net profit of 275.36 million yuan ($42 million), down from 2.42 billion yuan from a year earlier and slightly above an average forecast of 267 million yuan from three analysts polled by Reuters.
BYD forecast in July that it expected its first-half net profit to be between 121.06 million yuan and 363.18 million yuan.
The results lagged rivals such as Geely Automobile Holdings (0175.HK) which reported a 17 percent earnings rise and Great Wall Motor which more than doubled net profit on improved sales and margins during same period.
BYD's F3 sedan was China's best-selling car brand in 2009 and 2010, but demand for most of its other models, such as M6, S6 and L3, has been lukewarm.
"The problem is they didn't have a continuous flow of product launches that let them build on their initial success," said William Russo, an industry veteran who runs Beijing-based consultancy firm Synergistics.
BYD, which competes with Geely, Chery Automobile among others, has rolled out two cars, G3R and S6 sport utility vehicle, so far this year, to be followed by its most pricey sedan G6 in the second half.
The earnings announcement came after markets closed.
BYD's Hong Kong-listed shares, which have lost 54 percent since the start of the year, dropped 5.5 percent on Monday, lagging a 0.5 percent gain of the Hang Seng Index .HSI.
Its Shenzhen-listed shares ended up 0.8 percent on Monday at 26.31 yuan, slightly ahead of a 0.7 percent dip in the benchmark Shanghai index .SSEC.
(Editing by Erica Billingham)