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Luxury-car market shifts gear in China

China is one of the biggest luxury car markets. Photo:

In recent years, luxury-car makers have been all fired up over China. The likes of Ferrari, Rolls-Royce and Aston Martin rolled out models carrying images of dragons or other auspicious symbols.

Lately, though, their fortunes have taken a turn for the worse. China's economic slowdown and Beijing's drive against conspicuous consumption are taking a toll. Ferrari's China sales volume in the first six months of 2013 was down 12.5% from a year earlier. Bentley's China sales were down 23%. At Lamborghini, sales growth has ground to a stop.

While the top end of the luxury-auto market is stalling, though, less pricey cars are faring much better. BMW's China sales volume for January-June was up 15% from a year earlier. At Jaguar-Land Rover, the increase was 16%; at Audi, 17.7%.

More-affordable premium brands such as BMW, Audi and Land Rover cater to China's growing middle class, rather than the country's uber-rich. McKinsey says the number of potential buyers for premium cars in China is set to grow rapidly as households with incomes above $34,000 more than triples to 23 million by 2020.

Investors looking to tap that market may run into trouble, with the likes of JLR-owner Tata Motors and BMW, whose home markets of India and Europe are dragging down growth. Instead, Hong Kong-listed Brilliance China Automotive is an almost pure play on sales of premium autos in China.

Brilliance owns 50% of a joint venture with BMW to make and sell the German-brand autos, predominantly the more affordable 3-series and 5-series models. The Chinese company's profit from the venture—substantially all of its earnings—was 2.1 billion yuan ($343 million) in the first half of 2013, up 60% from a year earlier.

Brilliance trades at about 12.7 times forecast earnings for the next 12 months, according to FactSet. BMW trades at about 9.2 times forward earnings. The potential earnings growth for the Chinese company is significantly higher. Bernstein Research analyst Max Warburton forecasts Brilliance's profit will more than double by 2015, buoyed by rising demand and higher margins as increased output leads to lower cost of production per vehicle.

Ultra-high-end car makers have done well from riding the Chinese dragon in the past few years. But from here on, China's broad middle class will breathe more life into auto makers that serve the more affordable slice of the market.

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