Competition hits Brilliance earnings

Brilliance China Automotive Holdings' Zhonghua car division reported an operating loss in the second half of last year, reflecting cut-throat competition in the local-brand segment.

According to a Standard & Poor's research report released yesterday, the division lost 112 million yuan in the June to December period on slowing sales, compared with an operating profit of 135 million yuan in the first half. The operation accounted for 33 per cent of the company's sales revenue last year.

A Nomura Securities report said sales in the first quarter of this year plunged 61 per cent year on year to 3,270 units, with market share dropping to 1.1 per cent from 1.5 per cent for all of last year. First-quarter sales in the entire car market grew 45 per cent year on year.

Zhonghua has a lot of catching up to do if the firm is to reach this year's sales target of 25,000 units.

To boost sales, Brilliance cut Zhonghua prices about 10 per cent recently. It has also announced plans to launch new models, a strategy that prompts scepticism among industry analysts.

'We are concerned about the company's decision to invest 500 million yuan to develop new sedan models in a bid to claw back market share,' Nomura wrote in its report. This raised business risks, it said.

BNP forecast a 51 million yuan loss before interest and tax for Zhonghua cars this year, assuming an 8 per cent rise in sales volume and 3 per cent price fall.

'We feel that Zhonghua's targeted consumers, the middle class, are more brand-sensitive, favouring foreign models like [Volkswagen's] Bora and Sonata rather than local brands,' a BNP report said.

Brilliance's BMW joint venture is expected to become the group's primary growth driver. BNP forecast it would account for 72.8 million yuan or 3.7 per cent of this year's net profit and 364.1 million yuan or 16.2 per cent next year.

Analysts said it was difficult to predict performance of the BMW operation as little cost information had been disclosed but did project a profit for the division this year.

'S&P remains concerned about the low predictability of [the company's] earnings due to the convoluted corporate structure, extensive related party transactions and low transparency,' its report said.