Fitch says Chinese automakers' growth will continue

Fitch Ratings said the Chinese automotive industry saw substantial improvements in earnings and profit margins in the first half of 2006 and has turned the corner away from the trend of declining profitability that started in 2004. Challenges remain, but the agency predicted that the growth momentum will continue through 2006 and positively affect the credit profiles of Chinese automakers such as Dongfeng Motor Group Co. Ltd., Chongqing Changan Automobile Co. and Tianjin FAW Xiali Automobile Co., Ltd.

What caught the attention of investors most in the interim results of Chinese automakers was the significantly improved profitability across the sector, according to the agency. Margins were higher than the previous year, with profit growth outpacing revenue growth. According to the China Association of Automobile Manufacturers, sales revenue and net profit of the Chinese auto sector in the first half of the year rose by 30.6% and 59.6% year over year, respectively, while net margin rose to 5.0% from 4.1% for the first half of 2005.

Fitch said the improvement in profitability was boosted by a rapid 27% vehicle sales growth in the first half of the year, which was largely driven by the "first car" demand from the increasingly affluent Chinese consumers. While industry overcapacity could continue to put pressure on selling prices, the agency said the healthy and acceptable stock levels in the industry and the over-fulfillment of the half-year sales targets in the leading auto makers largely mitigate the risk of a cut-throat price war.

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