Date
22 May 2017
The probe into Zhu Fusho may be negative in the short term, but market focus will ultimately shift back to the underlying business itself, JP Morgan said. Photo: Internet
The probe into Zhu Fusho may be negative in the short term, but market focus will ultimately shift back to the underlying business itself, JP Morgan said. Photo: Internet

Why Dongfeng corruption probe shouldn’t be a big concern

Dongfeng Motor (00489.HK) shares were briefly hit after the Communist Party’s anti-graft watchdog said Monday the auto maker’s president Zhu Fusho is under investigation for an alleged “severe disciplinary violation”, a phrase that usually means bribery.

But the stock recovered most lost ground Tuesday.

While the incident could have a short-term impact on the stock performance, JP Morgan argues that at the end of the day, market focus will shift back to the car business itself, and for that part, Dongfeng has a solid operation and its sales outlook is upbeat.

The company makes most of its earnings from three joint ventures with Nissan, Honda and PSA.

The Honda JV has some strong SUV offerings while the Nissan JV’s new model Teana will boost sales momentum in 2016, the bank noted.

The fact that JV product launches and production strategies are typically led by foreign partners also reduces the risk that any wrongdoing by Zhu would damage the company.

JP Morgan also cited the case of First Auto Works as an indication that other factors, such as underlying sales volume, policy stimulus or profitability, ultimately play a more decisive role in determining the stock performance.

FAW’s ex-chairman was investigated in a similar corruption charge in March this year and subsequently put behind bars, yet the listed subsidiaries of the group only suffered short-term corrections, the bank said.

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CG

EJ Insight writer

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