Banks bullish on car parts trade

PUBLISHED : Friday, 05 May, 2006, 12:00am
UPDATED : Friday, 05 May, 2006, 12:00am

Global sourcing trend likely to make world players of China's car suppliers

Investment banks in Hong Kong have turned bullish on the car parts industry, with the trend in global sourcing likely to make world players of China's car parts firms within three years, according to a leading research house.

'Hong Kong car parts firms have a rather low PE (price-earnings ratio) at 10 to 14 times when compared with first-tier global firms with a PE at 20 plus times,' said Charles Cheung, a director of Asia-Pacific equity research at Citigroup. 'With demand surging under the global sourcing trend, there is much room for development.'

Mr Cheung said that China, which about five years ago produced mainly commercial vehicles and trucks, was seeing a boom in the passenger car market.

'This is an opportunity for car parts suppliers,' he said.

Foreign carmakers such as Volkswagen and Toyota Motor Corp, seeking a foothold in China, have previously imported car parts from their home countries, leading to high prices and a loss of market share.

However, the recent supply agreement between car parts firm Norstar Founders Group and Beijing Automotive Industry Corp-Benz Daimler Chrysler Automobile (BAIC-Benz) may be the shape of things to come.

With China racing to build its own global car brand, and with suppliers at its doorstep, analysts say the nation's carmakers will undoubtedly follow the way of the South Koreans and Japanese who have built global brands while satisfying a massive domestic market.

'Guangzhou Automotive (parent firm of Denway Motors) illustrates the trend. The group now aims to have 40 per cent of its cars made locally,' Mr Cheung said.

'The group will promote its new Camry model in the middle of this year with its joint-venture partner Toyota, while next year the group will work with Hyundai. We believe at that moment, localisation of car parts will be up to 80 to 90 per cent.'

Carmakers over the next few years are increasingly being seen as the cornerstone of the new economy, according to analysts.

Xinhua news agency cited figures showing first-quarter vehicle exports more than doubled from a year earlier to 62,628 units, although intense competition had cut into prices.

'There's changing business model for carmakers. Historically, the car parts firms are set up around the carmakers in order to have a closer supply chain, but nowadays carmakers prefer global sourcing,' said Lui Sun-wing, a vice-president at Hong Kong Polytechnic University.

'It is true that consumer products in such a competitive Chinese market are price sensitive. Slim margins is one motivation for players to start thinking of cutting costs, and global sourcing is one of the ways of doing it.'

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