Sinotruk Targets Middle East, Africa, Russia Ventures

June 30,2008

Sinotruk (Hong Kong) Ltd., China's biggest heavy-truck maker, is in talks to establish joint ventures in the Middle East, Africa and Russia within six months, moving to boost overseas sales as domestic margins shrink.

“We want to make progress quickly in these markets and working with existing players will help us make it,” President Cai Dong said in an interview in the eastern city of Jinan yesterday, declining to name the potential partners. “We may see some results coming out of our negotiations this year.”

Sinotruk, based in Hong Kong, raised HK$9 billion ($1.2 billion) in an initial public offering in the city last year to fund expansion. The company plans to sell 33 percent of its vehicles overseas by 2010 as it is being squeezed domestically by competition from Dongfeng Automobile Co. and surging material costs, Cai said.

“Vehicle makers like Sinotruk are facing rising difficulties in manufacturing in China with increasing costs and competition,” said Vivien Chan, an analyst with Sun Hung Kai Securities Ltd. “Manufacturing overseas will also help them avoid trade and policy barriers.”

Sinotruk already sells trucks in kit form to independent assemblers in Indonesia, Vietnam and Morocco. The truck maker has no plans to seek acquisitions overseas at present because it isn't yet ready to run international units, Cai said.

The company is targeting emerging markets because its vehicles are more competitive in those areas, he added. The truck maker doesn't plan to develop vehicles for Europe and North America in the near future, he said.

Overseas Sales

Sinotruk's overseas sales more than doubled last year to 15,715. That helped overall sales of Howo trucks and other models climb 64 percent to 84,481. The company had a 21 percent share of China's heavy-duty truck market in the period. The company's trucks carry containers and other heavy loads.

The truck maker has raised prices twice this year to help offset surging costs for power, steel and other materials, Cai said. The increases, totaling 4,700 yuan on average, are still 1,000 yuan short of covering the higher costs, Cai said. Models start at about 200,000 yuan.

``We will see profit growth this year, but the pace won't keep up with the growth of our unit sales because of the rising costs,'' said Cai. Profit jumped 74 percent last year to 1.1 billion yuan.

Domestic Market

Truckmakers, unlike carmakers, have been able to raise prices in China because of surging demand and less competition. Sales of heavy trucks, with a capacity of more than 14 tons, rose 47 percent in the country last year, double the pace of the overall vehicle market.

Sinotruk fell 7.3 percent to HK$7.80 at the close of trading in Hong Kong. The truck maker has plunged 39 percent from its November share sale price of HK$12.88, outpacing a 19 percent decline by the benchmark Hang Seng Index during the period.

A new engine, which meets Euro III emission standards, may help boost Sinotruk's sales after China introduces tougher emission rules next month, Cai said. The engine will raise the sales prices of Sinotruk vehicles by about 10,000 yuan, compared with a 24,000 yuan increase for rivals, he said.

The truck maker has sold more than 1,000 vehicles fitted with the engine, according to its Web site. It will take competitors months, if not years, to develop rival models, Cai said.

Sinotruk's engine ``should make their vehicles more competitive,'' said Zheng Jun, an analyst with China Securities Co. in Beijing.

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