(Adds analysts comments and details)
By Tony Munroe and Anita Chan
HONG KONG, Sept 17 (Reuters) - Denway Motors Ltd , the Chinese joint venture partner of Japan's No. 2 carmaker Honda Motor Co , reported a 30 percent rise in first half earnings on Wednesday as increasing unit sales in the booming mainland market offset price declines.
Guangzhou-based Denway, which has been expected to face margin pressure amid fierce competition, posted first half net income of HK$674.33 million (US$86.45 million), compared with earnings of HK$518.48 million a year ago.
The results far exceeded the average forecast profit of HK$606.2 million by five analysts surveyed by Reuters.
Denway, whose joint venture makes the Honda Accord sedan and Odyssey minivan, did not provide financial details, but analysts said its margins may not have been squeezed as much as feared.
The firm, which nearly doubled its production capacity this year to 110,000 units, said it sold 48,436 sedans during the first six months of the year, a 74 percent year-on-year increase.
ING Financial Markets analyst Peter So had expected net margins at the company's Guangzhou Honda joint venture to narrow from 13 to 11 percent but said profitability may have held firm.
"I'm guessing the margin didn't come down," he said, adding that Denway may have also benefited from a tax rebate.
Denway's turnover rose nearly 10 percent to HK$719.9 million.
Early this year Denway cut the price of its new 2.4 litre Accord sedans by 12.8 percent to 259,800 yuan (US$31,380), although the firm's costs are also declining thanks partly to economies of scale and a greater reliance on domestic parts.
Denway launches its lower-priced Fit model this month, following a SARS-induced delay, alongside its Accord and Odyssey models, which watchers said could crimp margins.
S&P Equity Research analyst Chris Lee, who has an "avoid" rating on the stock, said that Denway may be able to maintain prices on the Accord given Honda's strong brand name in China.
"The problem will be for a lot of the lower-end carmakers -- those selling for under 100,000 yuan," he said.
Global auto giants are investing billions in China production lines in a scramble to cash in on a market that saw passenger car sales grow by 77 percent this year through July to 998,000 units.
The heavy investment has triggered fears of a production glut, and consultants KPMG warned on Wednesday that overcapacity in the China market looms within two years, with the passenger car market most vulnerable.
One of the few pure-play China auto stocks broadly open to foreigners, Denway has rallied over the past year. In the 52 weeks through Tuesday the stock has more than doubled. With a price-to-earnings ratio of 12.2 times forecast earnings, the stock may be fully valued.
"I would expect that most of the good news is already in the share price," said Merrill Lynch analyst Grace Mak before the earnings were released. Mak has a "neutral" rating on Denway.
Shares in minivan maker Brilliance China Automotive , which is in a joint venture to make luxury BMW AG sedans in China, have risen 143 percent in the year through Tuesday and trade at a forward p/e of 11.7 times.
(US$=HK$7.8=8.28 yuan)