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Geely said it expected net profit for this year to fall by about 50 per cent from the 2.66 billion yuan it earned last year. Photo: SCMP

Brokers slash Geely targets after profit warning over Russian risks

Currency volatility in Russia, the firm's biggest foreign market, could lead to half of this year's earnings being wiped out by falls in export sales

Kwong Man-ki

Car maker Geely Automobile stunned investors yesterday with a profit warning that said as much as half of this year's earnings may be wiped out by falls in export sales and losses from operations in Russia, the firm's biggest foreign market, which is buckling under a currency crisis.

Geely shares traded in Hong Kong sank as much as 22.1 per cent in response to the news, eventually recovering some poise but still ending down 17 per cent on the day at HK$2.59.

Geely, which owns Volvo, said in a filing to the Hong Kong stock exchange that it expected net profit for this year to fall by about 50 per cent from 2.66 billion yuan (HK$3.36 billion) last year.

JP Morgan cut its target price for the carmaker to HK$3.50 from the previous HK$3.70 in response. The bank also revised down its earnings forecast for Geely by 30 per cent to 1.4 billion yuan this year, and cut its forecast for next year by 17 per cent to 2.2 billion yuan.

Geely's foreign exchange losses could amount to 600 million yuan in the second half of this year and 300 million yuan next year as the Russian rouble could depreciate by another 40 per cent by the end of 2015, JP Morgan analysts wrote in a research note.

The rouble has lost about 50 per cent of its value against the dollar so far this year - with a massive 20 per cent being lost in just the first two trading days of this week.

The heavy selling, sparked by a combination of falling oil prices and deteriorating economic conditions in the face of tough sanctions from the West over the Ukraine crisis, has forced the Russian central bank to raise interest rates sharply in a bid to stabilise the currency.

The Finance Ministry has also been selling foreign currency in an attempt to try and shore up the rouble.

The problems in Russia have been badly timed for Geely, which has seen domestic sales weaken during its efforts to revamp its sales and marketing systems.

Geely had previously dismissed serious hits to its business from foreign exchange risks.

"The group considers that fluctuations in exchange rate do not impose a significant risk to the group since the group's operations are principally in mainland China and the group's assets and liabilities are mainly denominated in renminbi (yuan), the functional currency of the group," it said in its 2013 annual report, published earlier this year.

Russia is Geely's largest export market, accounting for about 30 per cent of its exports so far this year, some 4 per cent of total sales. Last year, 27 per cent of Geely's exports were to Russia.

The firm said export sales volume - accounting for about 15 per cent of total sales - was down 49 per cent in the first 11 months of this year. Total vehicle sales in the first 11 months of the year were down by 26 per cent to 363,000 units, just 84 per cent of its full-year target of 430,000 units.

Credit Suisse cut its target price to HK$2.50 from HK$2.80, saying the carmaker was unlikely to see turnaround despite its plans to launch a new car in the middle to high-end market.

Mainland brokerage Guotai Junan Securities said a 50 per cent decline in export contributions would be worse than it had been forecasting, but it maintained a target price of HK$2.60.

"As we expect the contribution from exports will likely drop next year, the impact of weakness in Geely's overseas markets could be reduced," said Harry Chen, an automotive analyst with Guotai Junan.

Localising some production in Russia would also help reduce foreign exchange risks, Chen said, adding that he thought the stock was oversold relative to peers including Great Wall Motor and Chery Automobile, which also had significant Russia exposure and were likely to see profits pinched.

Great Wall shares ended the day down 3.03 per cent yesterday at HK$38.35.

Geely said it had started to raise prices in Russia to help offset the depreciation of the rouble. It also plans to speed up localisation of production in its major export markets.

This article appeared in the South China Morning Post print edition as: Investors stunned by Geely profit warning Geely stuns investors with profit warning
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