PUBLISHED : Sunday, 30 April, 2006, 12:00am
UPDATED : Sunday, 30 April, 2006, 12:00am


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About a year ago Merrill Lynch upgraded its recommendation on Denway Motors, the Chinese venture partner of Japan's Honda Motor, from 'neutral' to 'buy', believing the sales outlook for the Chinese car market would improve during the year.

Denway's share price had dropped 40 per cent in the previous 12 months due to concerns about credit tightening and car price reductions. The broker expected Guangzhou Honda, the joint-venture vehicle, to raise sales by 19 per cent in 2005 year and 15 per cent in 2006.

Potential improvement in the sales outlook during the course of this year would benefit Denway's share-price performance. Merrill Lynch had a 12-month price target of $3.60 on the stock, based on an estimated price/earnings ratio for 2005 of 11 times. The counter was trading at $2.725 at the time.

This month Denway reported its first profit decline in seven years for last year. Net income dropped 7.6 per cent to $1.9 billion from $2.06 billion in 2004.

Rising competition forced Denway and other carmakers to discount vehicle prices. The counter closed on Friday at $3.125.