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September 26, 2007
Shenyang Automotive sold 60,287 Zhonghua sedans in the first half of 2007, representing a 210.8% increase from 19,398 sedans sold during the corresponding period last year. 19,085 units of the Zhonghua Zunchi model were sold in the first six months of 2007, representing an increase of 66.8% from the 11,444 Zunchi sedans sold in the same period in 2006. The Junjie model, which was launched in March 2006, recorded a sale of 41,199 units in the first half of 2007, compared to 7,788 units sold during the period from March to June 2006.
Unaudited cost of sales increased 77.3% from RMB4,056.7 million (US$507.1 million) in the first half of 2006 to RMB7,193.6 million (US$930.6 million) for the same period in 2007. The increase was primarily due to the increase in unit sales of Zhonghua sedans. The average unit cost for both the minibuses and Zhonghua sedans decreased in the first half of 2007, mainly due to improvement in production efficiency together with the decrease in unit cost of components as a result of economies of scale.
The overall gross profit margin of the Group increased from 6.7% in the first half of 2006 to 7.1% for the same period in 2007. This is mainly due to a switch in sales mix between the minibuses and Zhonghua sedans between the two periods and the improvement in Zhonghua's margin in the first half of 2007.
Unaudited selling expenses increased by 41.8% from RMB211.2 million (US$26.4 million) in the first half of 2006 to RMB299.4 million (US$38.7 million) for the same period in 2007. The increase was mainly due to the increase in advertising, promotion and marketing expenses as well as transportation costs for finished products resulting from the increase in sales volume of Zhonghua sedans in the first half of 2007. The selling expenses as a percentage of turnover decreased from 4.9% in the first half of 2006 to 3.9% for the same period in 2007 as a result of higher Zhonghua sales volume achieved in the first half of 2007.
Unaudited general and administrative expenses increased by 28.0% from RMB324.9 million (US$40.6 million) in the first six months of 2006 to RMB415.9 million (US$53.8 million) for the same period in 2007, mainly as a result of additional research and development expenses incurred in the first half of 2007.
Unaudited interest expense net of interest income increased by 50.1% from RMB44.1 million (US$5.5 million) in the first half of 2006 to RMB66.2 million (US$8.6 million) for the same period in 2007, resulting mainly from higher amortization of redemption premium on the zero coupon guaranteed convertible bonds due 2011 (the "Convertible Bonds").
Unaudited net equity in earnings of associated companies and jointly controlled entities increased by 54.5% from RMB58.5 million (US$7.3 million) in the first half of 2006 to RMB90.4 million (US$11.7 million) for the same period in 2007. This increase was mainly attributable to an impairment loss on goodwill in a jointly controlled entity which was recognized in the first half of 2006 but not in 2007. However, the impact of the higher earnings from the lack of such impairment loss in the first half of 2007 was partially offset by decreased profits contributed by BMW Brilliance Automotive Ltd. ("BMW Brilliance"), the Group's 49.5% indirectly owned jointly controlled entity, and an associate in the first half of 2007.
Unaudited net profits contributed to the Group by BMW Brilliance decreased by 40.4% from RMB89.0 million (US$11.1 million) in the first half of 2006 to RMB53.0 million (US$6.9 million) for the same period this year. The BMW joint venture achieved sales of 16,260 BMW sedans in the first six months of 2007, an increase of 65.5% as compared to 9,822 BMW sedans for the same period in 2006. The lower net profits contributed to the Group in the first half of 2007 was a result of additional expenses incurred for the acceleration of component localization and certain adjustments of payments related to prior periods.
Unaudited net other income increased by 260.8% from RMB39.5 million (US$4.9 million) in the first half of 2006 to RMB142.5 million (US$18.4 million) for the same period in 2007. The increase was primarily attributable to the increase in sales of scrap materials, subsidies and foreign exchange gain realized during the period.
The Group recorded an unaudited income before taxation and minority interests of RMB0.7 million (US$0.1 million) in the first half of 2007 as compared to a loss of RMB190.3 million (US$23.8 million) for the same period in 2006. Unaudited taxation decreased by 31.0% from RMB25.5 million (US$3.2 million) in the first half of 2006 to RMB17.6 million (US$2.3 million) for the same period in 2007, resulting mainly from a decrease in taxable income of one of our subsidiaries.
Unaudited other comprehensive income increased by 131.1% from RMB13.2 million (US$1.7 million) in the first half of 2006 to RMB30.5 million (US$3.9 million) for the same period in 2007, representing the fair value adjustment for securities available-for-sale in the respective periods.
As a result, the Group recorded an unaudited comprehensive income of RMB82.6 million (US$10.7 million) for the first half of 2007 as compared to an unaudited comprehensive loss of RMB83.4 million (US$10.4 million) for the first half of 2006. Unaudited basic income and dilutive income per ADS was US$0.18 for the first half of 2007 as compared to unaudited basic loss and dilutive loss per ADS of US$0.33 in the first half of 2006.
Mr. Wu Xiao An, Chairman of the Company, said "the Group has achieved solid improvement in its financial performance during the first half of 2007. Our Zhonghua sedans registered an impressive 2.1 times growth in unit sales over the corresponding period last year. Looking into the second half of 2007, the Group will strive to stabilize the sale and market share of its minibus products while exploring new market opportunities with our partner Toyota. As for the Zhonghua sedans, the Group will continue to enrich its product portfolio and heighten its brand recognition by introducing new models, such as the Zhonghua coupe which will be launched in the third quarter of 2007. The Group will also proactively seek to capture new market opportunities, both domestically and overseas, while at the same time focusing on enhancing product quality and streamlining operations to improve production efficiency. At the same time, the Group will continue to implement further cost cutting measures, including the deepening of component localization for our BMW joint venture which is expected to achieve import tariff reduction across all models in 2008."
The Company, incorporated in Bermuda, was established in 1992 to own a 51% interest in Shenyang Automotive, a Sino-foreign joint venture enterprise established in 1991. Shenyang Automotive, located in Shenyang, the capital of Liaoning Province and the commercial center of the northeastern region of China, is the leading manufacturer of minibuses in China. In May 1998, the Company acquired a 51% equity interest in Ningbo Yuming, a wholly foreign- owned Chinese enterprise primarily engaged in the production of automotive components. Subsequently, in October 2004, the Company further acquired the remaining 49% equity interest in Ningbo Yuming. As a result, Ningbo Yuming became a wholly owned subsidiary of the Company. In May 1998, the Company also acquired a 50% equity interest in Mianyang Xinchen Engine Co., Ltd., a Sino- foreign joint venture manufacturer of gasoline engines for use in passenger vehicles and light duty trucks. In October 1998, June 2000 and July 2000, the Company established Xing Yuan Dong, Ruixing and Ruian, respectively, as its wholly owned subsidiaries to centralize and consolidate the sourcing of auto parts and components for Shenyang Automotive. In December 2000, the Company acquired a 50% equity interest in Shenyang Xinguang Brilliance Automobile Engine Co., Ltd., a Sino-foreign equity joint venture manufacturer of gasoline engines for use in passenger vehicles. In December 2001, the Company acquired 100% of the equity interests in Dongxing, a foreign-invested manufacturer of automotive components in the PRC. In December 2001, the Company established a 90%-owned Sino-foreign joint venture, Shenyang Xingchen Automotive Seats Co., Ltd. ("Shenyang Xingchen"), a manufacturer of automotive seats in the PRC. Shenyang Xingchen has ceased its operation since 2002.
In April 2002, the Company established an indirect 75.5%-owned subsidiary, Jindong, to trade automotive components and scraps in China. In May 2002, Shenyang Automotive obtained the approval from the Chinese Government to produce and sell its Zhonghua sedans in China.
In March 2003, the then indirect 81%-owned subsidiary of Company, Shenyang JinBei Automotive Industry Holdings Company Limited ("SJAI"), entered into a joint venture contract with BMW Holding BV to produce and sell BMW sedans in China. In April 2003, the Company, through its indirect 90%-owned subsidiary, entered into an agreement with the 10% shareholder of SJAI to acquire an additional 9% interest in SJAI. Upon completion, SJAI has become 89.1% indirectly owned by the Company and 10.9% directly and indirectly owned by the other shareholders. Accordingly, the Company's effective interests in the joint venture with BMW increased from 40.50% to 44.55%. Further, in December 2003, the Company further increased its effective interest in SJAI from 89.1% to 99.0% and thereby increased its effective interest in the joint venture with BMW from 44.55% to 49.5%.
In June 2003, the Company established a wholly owned subsidiary, ChenFa, to develop, manufacture and sell engine components in China.
In December 2003, the Company entered into agreements in relation to the proposed acquisition of an indirect 33.1% interest in Shenyang JinBei Automotive Company Limited, the joint venture partner of Shenyang Automotive and the supplier of certain automotive components for its minibuses and sedans production. Upon completion of the proposed acquisition and approval from the relevant government authorities, the Company's effective interests in Shenyang Automotive will be increased from 51.0% to approximately 63.9%. The transfer has been approved by the State-Owned Assets Supervision and Administration Commission of the State Council, and final approval by the China Securities Regulatory Commission is pending.
In April 2004, the Company established an indirect 63.25%-owned subsidiary, Hidea Auto, a company engaged in the design and development of automobiles and the provision of consulting services in relation to the Chinese automotive industry.
In December 2004, the Company established a direct & indirect 75.01%-owned subsidiary, Power Train, to manufacture and sell powertrains for engines in China.
In January 2006, the Company established an indirect 48%-owned joint venture, Shenyang Jinbei Vehicle Dies Manufacturing Co. Ltd., to manufacture and sell automotive components.
Translation of amounts from Renminbi (Rmb) to U.S. dollars (US$) for the convenience of the reader has been made at the rate of US$1.00=Rmb7.73 for 2007 and US$1.00=Rmb8.00 for 2006. No representation is made that the Renminbi amounts could have been, or could be converted into U.S. dollars at that rate or at any other rate. All financial information presented herein has been prepared in accordance with generally accepted accounting principles in the United States of America.
(Sep 21, 2007)