Wuhan-based Dongfeng Motor’s profits to take a hit as carmaker delays resuming production at all its plants
- China’s second-largest carmaker has most of its production capacity in Hubei province, epicentre of the outbreak
- Epidemic another blow to China’s car industry reeling from two years of declining sales
Dongfeng Motor, China’s second-largest carmaker based in Wuhan, will post lower profits as a result of the extended production break arising from the deadly coronavirus outbreak, analysts say.
Dongfeng Passenger Vehicle, a Hubei-based subsidiary – the epicentre of the Covid-19 outbreak – is planning to return to production on February 23, while Dongfeng Commercial Vehicle, another arm, will resume production on February 21, according to Chinese media.
Dongfeng’s Ebitda margin, a key profitability ratio, could decline to 8 per cent in 2020 from an earlier forecast of 9 to 10 per cent if production is suspended for another one to two months, rating agency S&P Global said on Monday.
“By our estimate, [Dongfeng Motor] will see annual production loss of at least 4 to 5 per cent based on the current production suspension schedule,” S&P Global analysts led by Stephen Chan wrote in the report.
The global death toll from the epidemic rose to 1,775 on Monday, with more than 71,000 confirmed cases of infection. Nearly 1,700 of the deaths were in Hubei, the central Chinese province where the virus originated.
Dongfeng’s production capacity stood at 3.6 million units in 2018 and most of it is located in Hubei. The company employs more than 160,000 workers across China. Last year, its sales declined 4 per cent to 2.93 million units, ranking second in the mainland.
China’s new energy vehicle sales more than halved in January, as Covid-19 weighs on world’s largest car market
“Dongfeng needs to prepare for the worst, since it will be a difficult job to resume production at its Hubei-based facilities in a short period of time even after the virus is contained,” said Gao Shen, an independent analyst covering manufacturing industries, in Shanghai. “The negative impact will be huge.”
Production is unlikely to catch up even after the outbreak passes, S&P analysts said, as a result of safety measures such as quarantine for migrant workers returning to work and a potential shortage of car components caused by suppliers' production suspension and logistics disruptions.
Aside from its own brands such as Vanucia and Fengxing, Dongfeng also makes and sells cars in the country in partnership with foreign carmakers including Honda Motor, Nissan Motor, Groupe PSA and Renault.
Dongfeng’s Shanghai-listed shares have declined 13 per cent so far this year, while its Hong Kong-traded shares have fallen 8.2 per cent.
The Covid-19 outbreak has added to the woes of China’s car industry, which has already suffered sales decline for two straight years after two decades of rapid growth.
S&P Global said that the uncertain demand outlook in China’s car market will exert additional stress on the company’s operations and margins.
In China’s Motown, Dongfeng Motor epitomises how state ownership thrives, evolves under capitalism
Paul Gong, a UBS analyst predicted that about 20 per cent of China’s carmaking capacity would be lost in the first quarter because of plant shutdowns, supply-chain disruptions and reduced workforce.
A total of 1.4 trillion yuan (US$201 billion) could be lost in China’s gross domestic product because of the epidemic, as manufacturing and construction companies delay resumption of production, analysts at financial advisory firm China Renaissance estimated in a report on Monday.
China Renaissance has cut its forecast for China’s first-quarter economic growth rate to between 4.1 and 5.6 per cent, from between 5.8 and 5.9 per cent.
Separately, carparts maker Chongqing Sokon Industry Group said in a filing to Shanghai’s stock exchange that the virus outbreak “has had a direct impact” on its planned takeover of Dongfeng’s joint venture through a 3.85 billion yuan (US$553 million) stake sale, according to a Bloomberg report. The target firm, based in the hard-hit Hubei province, has not been able to update its financials amid the suspension of on-site audit and verification.
