Smart move Smartcom
SALOMON Brothers have down-graded their investment recommendation on carmaker Qingling Motors due to cuts in production and adverse shifts in currencies.
The brokerage has changed its recommendation from a buy to a hold.
Continued credit tightening in China is affecting the carmaker.
Although orders have been taken and production targets set, credit tightening has meant the group cannot make deliveries because customers cannot pay up.
About 40 per cent of the group's customers are State enterprises.
Last year the group received orders for 33,258 vehicles.
The company produced 24,000 in the first 10 months of the year and was not expected to hit the full year target of 27,000 vehicles.
The production target for 1995 has been brought down to 30,000 from 35,000 and there is expected to be significant inventory build-up because of customer cash flow problems.
The weakness of the United States dollar on the yen will mean component imports from Japan will become more expensive than anticipated, thus affecting margins.
Although the group says prices are remaining stable, Salomon expects domestic competition to be intense and the operating profit margin could slide to 19.3 per cent from 21.6 per cent.
Not surprisingly the brokerage has cut its profit forecast for the group by 8.9 per cent from 608 million yuan (about HK$553 million) to 554 million.
This follows the reduction of 14 per cent in expected production targets.
While the investment recommendation on the company has been reduced the brokerage does not expect a disaster at the auto-maker and expects its share price to remain relatively buoyant. Uncertainty linked to the group is probably in the company's low price earnings valuation.
Qingling 1994 price earnings ratio is 7.7 times. It is 8.2 times in 1995 on prospective earnings and 7.5 times prospective earnings in 1996.