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Thursday, January 04, 2007

Shares of automotive stocks Brilliance China Automotive (1114) and Dongfeng Motor Group (0489) jumped more than 10 percent Wednesday while Geely Auto (0175) climbed nearly 5 percent, as investors started picking the laggard stocks on the Hang Seng Index.
Brilliance China, a Chinese partner of Bayerische Motoren Werke, surged 14.8 percent to close Wednesday at HK$1.63, amid speculation that BMW is acquiring a 20 percent stake in the carmaker for 180 million euros (HK$1.86 billion). The price represents HK$2.45 per share.

However, Merrill Lynch said the agreement is not close to being finalized and has downgraded its target price.

"Brilliance admitted the parties have been in talks regarding a potential acquisition but they have not been able to agree on the corporate structure, let alone the cost," wrote Grace Mak, a Merrill Lynch analyst, in a report.

Merrill Lynch has downgraded the target price for Brilliance China to HK$1.70 from HK$1.75, while cutting its 2006 earnings estimate from 150 million yuan (HK$149.5 million) to 51 million yuan due to higher marketing expenses for a joint venture with BMW, and slower minibus sales.

Dongfeng Motor also climbed 10.1 percent to close at HK$4.25 after hitting a record high of HK$4.29 during the day. Denway Motors (0203) climbed 4.76 percent, while Great Wall Motor (2333) remained unchanged.

Analysts believed the price surge in Brilliance China was mainly due to speculation about the BMW acquisition. Other auto stocks climbed as liquidity flowed into lagging stocks as the benchmark HSI continued to hit record highs.

"The price war in China's auto sector will slow down as the industry recovers," an analyst said. "The 12 times average price-earnings ratio of the Hong Kong-listed auto stocks also looks attractive compared with the world average of 15 times."

China's auto exports are likely to have hit a record high 340,000 units in 2006, nearly double the 172,000 units in 2005. Passenger car exports are likely to have tripled to over 90,000 units in 2006, Xinhua News Agency reported.

China will introduce a permit system March 1 for auto exports and some auto parts in a bid to better regulate the industry, as its rapid growth has raised concerns about unfair practices.

Manufacturers must prove they are able to provide after-sales service and that they have a strong sales network in the target markets before being granted a permit, according to Xinhua.

It also reported earlier that China would be establishing export quotas in 2007 in order to weed out companies that are too small to be serious exporters.
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