China's Geely Automobile Holdings, whose parent bought Ford's Volvo unit this month, warned of tougher competition and slower sales after its record first-half earnings beat forecasts on Wednesday.
China overtook the United States last year to become the world's biggest car market, as Beijing rolled out incentives to boost spending during the global downturn.
But that growth is expected to wane in the second half as the government presses the brakes to keep the economy from overheating.
The headline is positive but investors will continue to focus on what is going to happen in the next 12 months, said Steve Man, an analyst at Samsung Securities. We believe that earnings growth will moderate during that period because of lower sales and lower utilization.
Competition is rising in China as some auto makers cut prices to boost sales, which have been slowing from last year's breakneck pace.
Founded by Chairman Li Shufu, dubbed the Henry Ford of China, Geely said it will launch new and higher end car models this year and focus on building its export business to making it less vulnerable to China's volatile domestic market.
But exports won't provide boost the car maker's revenue just yet. Exports should make up 3.5 percent of Geely's total sales this year, down from about 6 percent in 2009 and would not be a major contributor during the period, Executive Director Lawrence Ang told reporters in Hong Kong.
A PROFIT FOR VOLVO
Despite the dimming outlook for China's auto market, there is a potential bright spot for the carmaker -- its parent's new Volvo unit.
If the Geely's parent, Zhejiang Geely, can turn Volvo around, that could allow Geely to benefit from technology transfers and eventually take over the premium brand, said Man.
Volvo has been profitable since the start of the year, said Li Shufu, speaking in Hong Kong after the results, a big change for the luxury brand, which posted a $653 million pretax loss last year.
Geely and Volvo are just like brothers, said Li. But he played down expectations that the listed-Geely would see quick benefits from the Volvo buy.
While the company has the right to use Volvo's more advanced production technology, Geely is unlikely to use it extensively soon as it will inflate production cost, said Li. Further, while the company hopes to begin producing Volvo cars in China for the domestic market, new production won't begin in the near term.
I am very anxious about this, but there needs detailed study and research by Volvo, which has not started yet, and the board and government approvals, he added.
Geely, which has been trying to move up the value chain by launching bigger and better quality cars in China, posted a 804.85 million yuan ($118.4 million) net profit for the first six months of this year against 595.91 million yuan a year earlier.
The record profit topped an average forecast of 756.4 million yuan from four analysts polled by Reuters.
The company sold 195,734 cars in the first six months, up 42 percent from a year earlier. But its July sales growth turned negative, falling 12 percent to 21,684 year on year.
But Li said Geely was confident that it could achieve its 2010 sales target of 400,000 units, up 22 percent from 2009.
Geely's domestic rival BYD (1211.HK), backed by U.S. billionaire Warren Buffett, reported disappointing second-quarter earnings on Monday and said it would launch new models to lessen the impact of a slowdown in the home market.
Weakening sales have hurt Geely shares, which are down 39 percent this year against a 6 percent fall in the main index.
The stock surged nearly seven-fold last year on bullishness about the Volvo purchase and an investment in the company by Goldman Sachs (GS.N).
(Editing by Don Durfee and Lincoln Feast)