The Chinese car making venture between Denway Motors and Honda Motor increased pre-tax profit 94% in the first five months of this year and reportedly said sales growth was strong despite fears of a slowdown.

Reuters said the figures gave comfort to investors worried that heavy investment by foreign car makers in the world’s fastest growing market was creating a margin-slicing glut.

Guangzhou Honda Automotive Co Ltd, which contributes most of Hong Kong-listed Denway’s profit, also said it will raise its 2004 sales and production target by 5.8% to 211,500 units, the report added.

“In May, although the overall growth in China’s sedan market slowed, Guangzhou Honda’s sales and output growth are relatively high,” Zeng Qinghong, deputy general manager of Guangzhou Honda, reportedly said in a speech prepared for the international car show this week in Beijing.

Reuters said that Guangzhou Honda, which is 47.5% held by Denway and 50% owned by Honda, sold 13,886 vehicles last month, up 43.9% from May 2003.

Its profit before taxes, including value-added, consumption and income taxes, rose 94% to 3.78 billion yuan ($US457 million) in the first five months of 2004, the report added.

It sold a total of 58,864 Accord sedans, Fit [Jazz] saloons and multi-purpose Odyssey minivans for the first five months, up 60.2% from the same period last year, Reuters said, noting that this equates to a pre-tax profit per car of $7,764.

The company would boost output by adding overtime shifts to satisfy customer demand, Zeng reportedly said in the speech posted on the joint venture’s website.

“These sales numbers are very strong,” Christopher Lee at S&P Asian Equity Research, told Reuters, adding: “It tells me things are still going very well for them. They are gaining market share.”

Reuters said shares of Denway ended up 1.57% at $HK3.225 on Wednesday after opening lower. Other Hong Kong-listed Chinese car makers saw heavy sell-offs on Tuesday on fears of oversupply and tightening of car finance in China, the report noted.

Reports in Hong Kong said total car sales in China had fallen 20% in May from April, but industry sources have not confirmed the figure to Reuters.

“I thought the selling yesterday and the day before was indiscriminate (and) across the board. The market doesn’t seem to distinguish good companies and bad companies,” Lee reportedly said.

Reuters noted that Denway shares dropped 6.6% on Tuesday and were down 34 percent in the three months ended Tuesday.

The news agency noted that foreign car giants General Motors and Ford this week announced massive capacity expansions in China, adding to worries of a looming glut, and that other China auto stocks in Hong Kong continued to slide on Wednesday, with minibus maker and BMW joint venture partner Brilliance China Automotive losing 1.89%, sport utility vehicle maker Great Wall down 3.19% and Geely Automobile falling 3.61%.

Merrill Lynch reportedly said “potentially more negative news” on capacity expansion plans in China could emerge this week during the Beijing motor show.

“The default rate on auto financing is speculated in the market as being alarmingly high and local banks might tighten up,” Merrill said in a Wednesday research report cited by Reuters.

It reportedly expects further downward pressure on both Denway and Brilliance shares before market sentiment turns “less negative” and car sales pick up in the third quarter.

“We expect to hear more about new car models and price reductions that favour demand in the near term,” Merrill said, according to Reuters, which added that Denway launched its 1.5-litre Fit model this week in Beijing, priced at between 109,800 yuan ($US13,260) and 119,800 yuan.