Geely Profit Warning Seen as Bad Omen for Other China Carmakers

(Bloomberg) -- Geely Automobile Holdings Ltd., controlled by Volvo Cars owner Li Shufu, issued a profit warning that drove down its shares and those of other Chinese automakers as it sparked concern investors are underestimating the depths of the industry’s slump.

Shares of Geely, which said late yesterday first-half profit plunged an estimated 40%, dropped as much as 7.6% in Hong Kong on Tuesday to HK$11.24, the lowest level in almost six months. Great Wall Motor Co., Guangzhou Automobile Group Co. and Dongfeng Motor Group Co. also declined.

Geely said a worse-than-expected drop in sales in the Chinese market prompted the company to push for a reduction of inventory. That triggered a broader fear that the automaker, which Sanford C. Bernstein sees as a barometer for sentiment on car stocks, is foreshadowing further pain across the sector.

“It should hopefully be obvious to most investors that first half earnings will be a painful experience for most Chinese” automakers and their suppliers, Robin Zhu, an analyst at Bernstein, wrote in a note to clients soon after the Geely profit warning.

Geely is among Chinese manufacturers hit by a stalling market after rapid growth over the past few years. While the industry boosted unit sales in June -- the first increase in a year -- the gains were helped by heavy discounting and a sustained recovery is far from certain as trade tensions simmer and the economy sputters.

In addition to Volvo, billionaire Li’s holdings include a stake in Daimler AG. Geely is now seeking to harvest synergies from his investments, working with Volvo Cars to improve its product lineup and move upmarket to higher-end models.

To contact the reporter on this story: Ville Heiskanen in Singapore at vheiskanen@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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