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Geely Rides on Low-cost Car Demand

Investors tend to favor shares in auto companies that make high-margin luxury brands, but they should consider alternatives like Geely Automobile, which sells economy sedan models, the biggest segment in China's fast-growing market for cars, according to a senior executive from the company.

"We're the most aggressive market player in pursuing price-cuts and economies-of-scale strategies," executive director Lawrence Ang said.

Geely Automobile's partner, Geely Holdings recorded sales of 80,065 vehicles last year. Two joint ventures formed last year between the two companies in Shanghai and Ningbo accounted for 43,365 of that figure. Total sales were up 67 percent over 2002 and gave Geely Holdings a 4 percent share of China's market for sedan cars, ranking it ninth among its peers.

Ang said sales should double to 160,000 vehicles this year, with an ambitious aim of selling 650,000 cars in 2007.

Geely Automobile, previously the Hong Kong-listed IT firm Guorun Holdings, changed its name last month after forming the joint ventures with Zhejiang-based Geely Holdings, a privately owned maker of economy sedans and sports cars.

It seems investors are increasingly turning to a stock providing exposure to China's low-priced car segment.

Geely Automobile shares gained 1.9 percent Thursday to close at HK$1.06, a record high and 70 percent up on a year earlier.

By buying the Hong Kong stock, investors are showing their optimism about continued growth at Geely Holdings, owned by tycoon Li Shufu and his brother, which sold its first cars in 1999.

Investors should get a clearer picture of Geely Holdings' performance when the Hong Kong-listed company reports results later this month for the first time since the joint ventures were formed in May and November last year.

Geely Holdings and the Shanghai and Ningbo joint ventures sell sedans priced as cheaply as 35,000 yuan (US$4,227.05) to 46,000 yuan, according to Ang, and cuts the price of at least some of its models every year.

At the start of this year, for instance, prices of the 1.3-liter economy sedans, branded Merrie and Ulion, sold by the two joint ventures were both cut 10 percent after component costs fell. Sales of the two cars climbed 60 percent to 70 percent year on year in January and February, Ang said, with operating margins remaining around 12 percent, which is "not very spectacular by industry standards."

However, Geely Holdings combines this strategy of low-cost models, with an aggressive push to raise volumes.

"Market share is relatively more important for us in the near term than profit margin because China's auto industry will experience a trend of declining profit margins in the next couple of years," said Ang.

"We need a critical mass. Then we can push down our per-unit costs, leaving room for maneuvering on pricing."

Geely Automobile may extend its China interests further through additional acquisitions from Geely Holdings, said Ang.

Among other Geely Holding assets is a car-making plant in the city of Linhai, also in Zhejiang. The plant sold 36,948 economy sedans last year, accounting for the remainder of the total, and targets sales of 65,000 units this year. It has not yet been trans-formed into a third joint venture with Hong Kong-listed Geely Automobile, which is waiting for the plant's return on investment to improve.

Alternatively, Geely Automobile may raise its stakes in the two existing joint ventures, once China's authorities approve such a move, Ang said.

(Shenzhen Daily April 5, 2004)

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