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November 10, 2005

HONG KONG: Chinese yuan’s gain would boost Dongfeng botom line

Dongfeng Motor Group, on track to raise up to US$590 million in a Hong Kong IPO, stands to see its profits grow by 3 to 4% for each percentage point rise in the Chinese yuan's value, according to Reuters, citing attendees of an investors lunch on Thursday.

Dongfeng Motor Group, on track to raise up to US$590 million in a Hong Kong IPO, stands to see its profits grow by 3 to 4% for each percentage point rise in the Chinese yuan’s value, according to Reuters, citing attendees of an investors lunch on Thursday.

Dongfeng, which makes passenger vehicles under 50-50 joint ventures with Nissan Motor , Honda and Peugeot Citroen, is set to price the deal on 30 November after closing its order book on Nov. 29, Reuters said. A trading debut is expected on Dec. 7.

“Although the company will benefit from an appreciating yuan, Dongfeng basically has no track record as it underwent several reorganisations, making its historical figures difficult to compare,” a Hong Kong fund manager, who attended the meeting, told the news agency.

Reuters said China’s yuan strengthened against the dollar on Thursday as dealers increasingly expected the central bank to allow the yuan to appreciate slightly ahead of a visit to the country by US president George W Bush from November 19.
Also, a 1% point drop in steel prices, which account for 8% of the firm’s costs, would lead to a 1% rise in Dongfeng’s profit, Merrill Lynch reportedly said.

A stronger yuan would make imported parts, which account for about 35% of Dongfeng’s total, cheaper. But China’s number-three car maker also expects its net profit to fall by 47% this year to 1.52 billion yuan ($188 million), due partly to higher steel prices and the absence of a one-off gain, Reuters added.

The news agency noted that Dongfeng’s deal comes amid concerns on overcapacity, high fuel prices and pricing pressure but added that UBS analyst Henry Wu had lifted his growth estimates for next year as total vehicles and sedan sales in the first nine months achieved better-than-expected growth of 10% and 18%, respectively.

“After a significant share price correction in 2004 and further weakness in 2005, we believe the auto sector will start to see improvement in 2006 both in terms of earnings and share price performance,” Wu, who expects total vehicles sales to climb 12% and sedans’ sales to rise 15% next year, told Reuters.

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