JARDINE International Motor Holdings (JIMH) re-wrote the record books last year, selling 2,987 Mercedes-Benz cars. Surprisingly, this year looks to be even better. And the recent slide in the share price offers a good buying opportunity. JIMH is the renamed Zung Fu, the motor-trading arm of the Jardine group, which has sole distribution rights to all Mercedes vehicles in Hongkong. The territory has one of the highest ratios of Mercedes-Benz ownerships per capita in the world. It also owns 49 per cent of Southern Star, the Mercedes distributor for southern China. Given the recent political drama in Hongkong and the pressure on the yuan across the border, it would be fair to anticipate a shake-up in consumer confidence in both markets. The shares suggest this, but the sales figures do not. JIMH shares have fallen from the year's high of $8.90 to yesterday's close of $7.30, and were not helped by reports that China is considering banning car imports as part of its strategy for restraining its runaway economy. But the fall appears over-done. Last year, the company posted a $478 million net profit, representing a 152 per cent surge from the previous year, due to the rampant sales of the S-series cars. Demand for S-series models has continued unabated and in the first five months of the year the company is estimated to have sold more than 1,500 cars, more than half the total for the previous year. In June, sales reports were even higher. Asia Equity has taken the punt and is forecasting net profit of $593 million for this year, putting the shares on an exceptionally low price-earnings ratio of 5.9 and a ridiculously generous yield of 7.8 per cent. Given the uncertainty of the business climate, this may be a little optimistic, but there is definitely value in the shares. The ups and downs of the yuan have yet to hit China sales, and as the company builds up its presence over the border, it will cash in on after-sales service income. Sales to China are not particularly profitable, so if Premier Zhu Rongji's proposed block on car imports does materialise, this would not devastate JIMH's earnings. In addition, the number of Hongkong cars that have found their way into Guangdong suggests that the mainland hunger for these status symbols will not go unfilled. There have been concerns over an increase in the Hongkong import duty on cars, in order to restrain new car purchases but, in its current form, the restructuring of the tax system would have little impact on JIMH. It is effectively closing a loophole to charge tax on the retail price, rather than import price, to prevent under-statement by car importers. In the wake of the yuan fall, there has been a tendency to sell down any shares which derive profits from China sales. In the case of JIMH, Southern Star contributed nine per cent of profits before interest and taxation, and so far this year sales have more than doubled. This should all become clear in the interim results, and the share price should react accordingly.
