(Adds analysts comments, details)
By Charlie Zhu
HONG KONG, Aug 29 (Reuters) - Shares of Chinese truck maker Qingling Motors tumbled about seven percent on Thursday morning, adding to an 18 percent loss on Wednesday, after its first-half profit plunged in the face of harsh competition.
Merrill Lynch analyst Grace Mak said she had downgraded the stock to "reduce" from "neutral" after Qingling's earnings tumbled 65 percent -- much more than she had expected.
Mak cut her 2002 net profit forecast for Qingling by 46 percent to 152 million yuan (US$18.36 million) from 280 million yuan.
"In light of weak margins and persistent pricing pressure ... We expect its earnings prospects to remain bleak in the next two years," she said in a report.
"The stock is trading on 2003 PE (price/earnings) of 14.3 times based on our revised earnings forecast, significantly above its peers," she added.
By 0314 GMT on Thursday, the stock had fallen 6.59 percent to HK$0.85 after 24 million shares changed hands.
Qingling's first-half net profit dropped to 59.42 million yuan (US$7.18 million). It blamed the decline on a plunge in sales of multi-purpose vehicles (MPVs) and fierce competition made more intense by China's entry last year into the World Trade Organisation.
"Inadequate cost management added to competitive pressure," Mak said.
Qingling, based in the southwestern city of Chongqing, is the mainland partner of Japan's loss-making Isuzu Motors and is one of China's biggest light truck makers with a market share of about 20 percent.
PRICE WAR BITES
In July 2001, Qingling cut prices on its light trucks and pickups for the first time in six years by eight to 10 percent in a bid to boost sales. Early this year, it cut prices on some of its diesel-engine pickups by five to six percent.
"Qingling has been hurt badly by the price war and the high yen. About 40 percent of its components are from Japan and I think it will suffer in the second half," said Herbert Lau, research director at Celestial Asia Securities.
"The competition is increasing. More and more foreign manufacturers are coming in and cutting prices and Qingling is also competing against smaller-scale domestic manufacturers which are selling products very cheaply," Lau said.
Qingling's leading product, an Isuzu-brand light truck, sells for 105,000 yuan, while a rival vehicle sold by Jiangling Motors costs 70,000 yuan.
U.S. giant Ford owns about 30 percent of Jiangling, which has been stealing market share from Qingling and last Friday posted an 85 percent surge in interim profit as sales of its light trucks and minivans hit record highs.
Qingling also competes with look-alike light trucks made by small Chinese automakers which sell for around 30,000 yuan.
Maurien Yau, an analyst at HSBC Securities, added: "With a high cost base, Qingling is expected to keep its premium pricing but at the expense of volume growth."
Yau maintained a "reduce" call on Qingling's shares.
Qingling said it was on track to meet its sales target of about 32,000 vehicles this year, up nine percent from the 30,279 it sold in 2001 and 41,100 in 2000. The 2002 target includes 20,000 light trucks, 3,600 MPVs and 800-1,000 heavy trucks.
(US$=8.28 yuan)