Auto industry gained huge profit in 1st

　　The first quarter of 2010 have already passed, and financial reports released by China’s auto manufacturers all sent common good news. That is, auto manufacturers’ profits also rose with the surge of car sales.

　　However, considering that inflation risk and policy efforts to stimulate consumption gradually weakened, auto manufacturers are supposed to face following strange situation. The rising stock, constantly expanded production, a corresponding rise in raw material prices as well as it is possible to ignite price-cutting war. Now, people are wondering how long auto manufacturers’ high profits can sustain.

　　Profit hit record

　　China’s auto industry came into the period of huge profit in the first quarter of 2010. According to statistics from China Association of Automobile Manufacturers on May 10, 17 key enterprise groups accumulated 466.204 billion yuan of industrial output value, up 89% compared with same period of last year. Main business income was 503.746 billion yuan, up 86% year on year. Total profits and taxes were 82.358 billion yuan, 1.55 times than the same period of last year. Composite index of industrial economic efficiency involves key auto industry enterprises (groups) was 504.89, which is 199.39 higher than the same period of last year.

　　Operating revenue, sales and profits are the main standards to determine the prospect for enterprises. However, we should take profitability or net profit of enterprises into consideration if we want to see whether a company has potential or not. There were no auto enterprises whose net profit increased less than 1.5 times.

　　Shanghai Automotive ranked first with nearly 2.9 billion net profits which is higher than total profit of the BMW Group in 2009. (Last year, BMW sold nearly 1.3 million cars in the world, but only achieved a mere 210 million euros of net profit). In the first quarter, Changan Auto achieved a record more than 26 times net profit increase, and meanwhile its car sales surged 86%. Changan attributed its success to tighter cost control and product optimization, especially the profitability of own brand business, and significant investment income contribution of the joint venture business year on year. Performance of other large auto enterprises were also gratifying, net profit of FAW increased by 181.94%, net profit of Dongfeng Motor profit was the most astonishing with net profit of 186 million yuan in the first quarter, an increase of 7481.57% compared with same period of last year.

　　Auto industry analysts pointed out that as preferential policies introduced in last year is continuing, potential of the second-tier and third-tier cities has been stimulated. Meanwhile, accelerating economic growth and the recovery of overseas cars export helped profits of auto enterprises greatly increased in the first quarter generally.

　　Strong rebound in commercial vehicle enterprises became a highlight in the first quarter. The top three most profitable listed entire vehicle companies were all commercial vehicle enterprises. They are: SG, JINBEI Auto and JMC, among them net profit of SG was 234.6%. Sales of leading commercial vehicle enterprise Foton was 178,169 units in the first quarter, up 42.9% compared with the same period of last year. Sales revenue of it was 13.85 billion yuan, up 81% year on year and net profit was 519 million yuan, up 179% year on year.

　　According to statistics, targeting heavy truck volume was more than 260,000 units in the first quarter of this year, up 162% year on year, which was the best performance in car market segment. As a result, it is expected to be more than 900,000 throughout the year, up about 40% year on year. In terms of displacement, engines with a displacement about 10L is the largest share of emission structure.

　　For the light truck market, according to CHANGJIANG SECURITIES analyst’s forecast, will continue its gradually increasing trend for some time. Analysts predicted increase of light truck market would continue to grow in the second quarter. With policy of car to the countryside is fading out, increase of light truck market is supposed to be lower than the fourth quarter of 2009.

　　It is notable that with surge of profits the investment into auto industry is increasing correspondingly. According to statistics of China Association of Automobile Manufacturers, investment into auto industry was 58.4 billion yuan in the first quarter, up 32% compared with the same period of last year.

　　New fixed asserts investment in the first quarter was 87.7 billion yuan, up 22% than the previous year. Among them auto enterprises raised 73.2 billion yuan by themselves, accounting for 83% of new sources of funding.

　　Inflation pressure

　　Indeed, sales growth of Chinese car market has slowed in April. According to China Association of Automobile Manufacturers’ statistics, sales growth was negative ten percent compared with March. Now, the car enterprises are facing following situations: the rising stock, constantly expansion, a corresponding rise in raw material prices, and it is possible to ignite price-cutting war. People are questioning whether high profit of auto industry can sustain or not.

　　"In early 2010, inflation is likely to be the biggest uncertainty for auto industry. Threat of inflation is gradually become a reality. Serious inflation will not only directly affect the profitability of auto manufacturers, but also to some extent inhibit the growth of car demands”, said Wu Wenzhao, a researcher at DONGHAI SECURITIES.

　　Steel prices have been rising continuously in recent six months. Even compared with early 2010, it also rose over 10%. According to analysis, steel prices will continue to rise. According to sensitivity analysis, increase of steel prices has a great impact on gross margin of commercial vehicles. Generally 10% increase of steel price will lower 1% gross margin of commercial vehicles, but its impact on passenger cars is relatively small.

　　For overall profit situation of the listed auto enterprises, industry analysts believe that the first and second quarter may be high point of profit increase for auto industry this year. To the second half of this year or the fourth quarter, gross margin of auto enterprises maybe decline slightly.

　　Sun Muzi, former analyst at ESSENCE SECURITIES believed that in terms of profit, profit of China’s auto industry maybe still keep high in the second quarter. However, in the third quarter and fourth quarter it will show a downward trend. He pointed out it is mainly the increase of PPI (producer price index), but the PPI conduction has time difference which is around a quarter therefore it will not significantly affect the profitability of the second quarter.

　　On the other hand, he believed that currently auto enterprises have motives to release profit, and behind it is potential financing need. At present, most fixed assets and relevant costs of major auto enterprises have already been in depreciation or amortization.

　　Though high profit of auto industry will not change, some experts believe that China's auto industry can not always maintain this high level of profits.

　　A senior auto practitioner said there is specific reason for high profit of China's auto industry last year. Under preferential policies issued by Chinese government, pent-up demand burst out and formed a shortage situation. As a result car prices kept high and profits of auto enterprises hit record. However, the preferential policy to stimulate consumption can’t remain unchanged this year. After shrinking of purchase tax incentives, growth of small car market slowed and car prices fluctuated with increase of stock. Meanwhile, the profits of manufacturers and distributors also decreased. In full competition auto industry, the main market characteristic is oversupply, so the price can not be as strong as last year and profit will be lower. (Translator: Qinghua Wade)

　　See original Chinese report Please click:

　　http://auto.sohu.com/20100514/n272112441.shtml