Lizhong Wheels' 1H08 results briefing. Photo by Leong Chan Teik.

LIZHONG WHEEL, one of China’s leading aluminum alloy wheel makers, ended 1H08 with top line growth of 16% to Rmb 518 million.

2Q08 yoy sales growth sped up to 20%, in line with growth forecasts for the domestic automobile industry.  This is an improvement over 1Q08, which grew only 12% yoy.

1H08 distribution costs spiked 49.6% due to accrued bonuses paid to marketing staff while admin expense jumped 54.5%.


The admin expenses include:

1. R&D expenses of Rmb 2 million for a flow-formed wheel production line, China’s first; and

2. Pre-operating expenses of Rmb 3.1 million incurred by new JVs; i.e. the 80%-owned Tianjin Dicastal and 51%-owned Tianjin Nano.

Tianjin Dicastal operates Lizhong Wheel’s huge Tianjin plant that will have capacity of 5 million wheels a year when its 3 phases are completed in 2010.

”Sales growth has historically mirrored our capacity expansion and will continue to,” says executive chairman Zang Ligen. File photo by Sim Kih
”Sales growth has historically mirrored our capacity expansion and will continue to,” said executive chairman Zang Ligen at today’s results briefing.

Phase I of Lizhong Wheel’s huge Tianjin plant was completed in Jul 2008 and increased capacity by over 50% to 5.6 million wheels a year.

Before this, the company operated at utilization rates in excess of 95% and sales growth had been limited by a capacity of 3.6 million wheels a year.

By 2010, it expects to be China’s largest aluminum alloy wheel maker, with capacity for 9.6 million wheels a year. Meanwhile, 1H08 earnings attributable to shareholders grew 14.9% to Rmb 63.7 million.

Gross margins were maintained at 17% while annualized ROE remains a healthy 32%.

Technology forefront

Flow-forming, an ultra-high precision technology, keeps Lizhong Wheel at the forefront of the global automobile market.

”China’s aluminum alloy wheel is of world-class standard,” says Mr Zang Ligen.

He adds that 60% of automobiles assembled in North America or Europe use wheels imported from China.

Lizhong Wheel’s Int’l

Certification Obtained

TUV (Germany)
VIA (Japan)
Nevertheless, only five or six Chinese wheel makers actually own the full range of qualifications for exporting to major automobile producing nations such as Germany, the USA and Japan.

And Lizhong Wheel is one of them.

Compared to the widely used low pressure cast wheels, flow-formed wheels are wider in diameter and yet weigh 15% less.  Implications:
Wider diameter means greater stability to vehicles
Wider diameter means more aesthetically flexible designs can be fashioned

Wider diameter means higher selling price

Lighter wheels cost less to produce because less alloy metal is used

Lighter wheels are more fuel-efficient and therefore more popular

Bringing mould production in-house

Lizhong Wheel's unique position of being in retail, OEM and export markets bode well for a downturn in any of the three.
Tianjin Nano was set up in Feb 2008 mainly to develop and produce aluminum alloy wheel moulds. 

Benefits of bringing mould production in-house:
+ Wheel designs will more closely follow specifications from Lizhong Wheel’s R&D department
+ Mould delivery time is cut from 45 days (for third party moulds) to 25 days
+ Cost savings of over Rmb 3 million a year

Each set of mould purchased from third parties costs about Rmb 120,000.

The company expects savings of 15% on mould costs with the commencement of Tianjin Nano’s production in Jun 2008.

As the JV's annual production capacity of 240 moulds is greater than its needs, excess mould making capacity will be made available to other wheel makers.

On the wheel production front, Mr Zang sees
the domestic OEM market as being able to keeps the company's utilization rates high, its retail segment as a branding vehicle, and the export market as a margin booster.

Proximity to Beijing may affect 3Q08

3Q08 may be affected by the Beijing Olympic games, according to CFO Zhang Jinli.

Lizhong Wheel’s existing plants at Baoding and Qinhuangdao are located near Beijing for strategic reasons, but proximity to the Chinese capital is working against the company in this case.

For several weeks, there are restrictions on the use of logistics trucks within 300 km of Beijing.

Some factories may even be ordered to halt operations should pollution levels be deemed to be at unacceptable levels.

It remains to be seen whether the Tianjin plant’s additional capacity will be dampened by the games.

Read other Lizhong Wheel results reports:
FY07LIZHONG WHEEL’S profit up 34%; UOB Kayhian’s target price $1.07
1Q08LIZHONG WHEEL'S 1Q08 net earnings up 42% to Rmb 35.2 m

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