Interview: CHINA HARMONY Not Tethered To Tesla

LUXURY AUTO DEALER China Harmony New Energy Auto Holding Ltd (03836) should not be seeing many detours from its Tesla ties despite the latter's recent troubles taking off in the PRC, a market expert told Asia Fund Space.

Mr. Leo Lee, Analyst with SBI China Capital recently initiated coverage of the Hong Kong listco with a "Buy" recommendation and a target price of 7.50 hkd.


Asia Fund Space:  China Harmony is one of the major after-sales services partners of Tesla in China, but sales of Tesla these past three or so years have been sharply lower than expectations, with quite a few executive reshufflings to address the bumps in the road.

Are you concerned about China Harmony's heavy exposure to this brand?

Mr. Leo Lee:  Its cooperation with Tesla is not a major business and income source, so I am not too concerned about sales of Tesla in China.

But as Elon Musk (Tesla Motors founder) has planned that there will be a manufacturing base in China in the future (site selection will be in FY2016), sales will increase.

Besides, Tesla's high-end image matches with Harmony Auto's business image, and benefits its development of high-end EVs in FY 2017/18.

Asia Fund Space:  Everyone seems to be talking about now that coal and oil prices are at multi-year lows, the attraction of EVs and hybrids is weakening.

Does China Harmony have sufficient exposure to a variety of different vehicles to ensure stable revenue going forward?

Mr. Leo Lee:  Although the oil price has dropped a lot recently, this will not be sustainable.

EV development is the PRC's policy, and I believe there will be huge demand in the future.

However, the profitability of high-end EVs can only be consolidated in FY2017, thus in FY2016/17 profits will be mainly contributed from after-sales.

Besides, EV development is still in the early stage and I believe the acquisition of Greenfield Motor (a low-end EV brand) helps upgrade Harmony's R&D of EV technology.

Low-end EVs are not their target, but manufacturing high-end EVs with retail prices over 200,000 yuan is their goal.

Hexie Futeng recently invited the Head of Vehicle Program i8 bei BMW Group (Mr. Carsten Breitfeld) and Managing Director, Infiniti Business Unit China at Infiniti (Mr. Daniel Kirchert) to be CEO and COO, respectively.

I believe their experience will lead Harmony to develop brand new and popular EVs in China and that's what I mainly focus on.

Asia Fund Space:  As one of the largest pure luxury and ultra-luxury vehicle dealer and after-sales service providers in China, does China Harmony run a risk of being targeted (or otherwise negatively impacted) by the ongoing anti-luxury/anti-spending/anti-corruption campaign by Beijing, or is the auto sector generally unaffected?

Mr. Leo Lee:  The anti-graft campaign is one of their business risks, and this should be reflected in the results and stock performance.

But recently, BMW sales figures were released and did not perform well last year, and this may affect the performance of new car sales.

China Harmony New Energy Auto Holding Ltd is a dealership group that deals exclusively in luxury and ultra-luxury passenger vehicles in China. The Company's dealership outlets are located in populous and affluent cities in China.

(Note: This story is contributed by Andrew Vanburen. Mr. Vanburen has served as a government official focused on international trade at the American Institute of Taiwan in Taipei, and worked in financial journalism for nearly a decade in both Beijing and Shenzhen. He holds a Master's Degree from New York University. He is currently Director at Hong Kong-based Asia Fund Space. For more information, please visit: www.asiafundspace.com)