Chigo Holdings, China's third largest air-conditioner maker, announced Friday it would review prices and make higher-end models in order to stay profitable amid rising costs.

Li Xinghao, chairman and chief executive officer at Hong Kong-listed Chigo, said overall costs rose about 20 percent so far this year compared to last year.

"We will adjust our selling prices based on cost. Meanwhile, we will make more efforts in enhancing research and development capacity, producing higher-margin models," said Li after meeting shareholders in Hong Kong Friday.

Donald Leung, chief financial officer at Chigo, did not elaborate on the company's performance in the first quarter, saying only, "our annual growth target of 30 to 35 percent needs no revision".

Chigo plans to expand into central air-conditioning products in 2011 and expects that "sales and profitability of the Group could be further enhanced" through this initiative, according to its 2010 annual report.

In 2010, the company raked in 80 percent of revenue from home air-conditioners.

Gross margins (including government subsidies for energy-saving products) of residential air-conditioning products dropped to 19.5 percent from 20.1 percent last year on rising raw material costs.

Analysts said profit margins of air-conditioner makers would not be squeezed as selling prices had room to rise further on robust demand. Moreover, cost pressure has shown signs of alleviating recently.

According to industry statistics, for the first three months of 2011, domestic sales of air-conditioners increased 30 percent year-on-year, and overseas sales surged 48.6 percent.

Zhou Fei, an industry watcher at Nanjing Securities, said domestic sales this year would maintain the strong momentum set in 2010, growing 30 to 35 percent.

"The market is far from saturated. Growth potential in both urban and rural areas are huge, which bode well for further price raises," said Zhou. Gree, the largest air-conditioner maker in China, has raised prices of its models by 5 to 20 percent, he noted, adding that an industry-wide 5 to 15 percent price rise is already being observed.

Miles Xie, a home appliance analyst with BOCOM International, said although labor and metal costs were rising, it was easier for air-conditioner makers to transfer costs to consumers since the industry had a high degree of concentration.

In terms of sales volume, the four largest makers had a 69 percent market share in the first three months this year, according to an industry analysis report by China Jianyin Investment Securities.

Copper, a major raw material used in air-conditioners, has experienced a dip in price in recent weeks.

The price of three-month delivery copper dropped 8 percent from mid April on the London Metal Exchange.

The latest survey by Bloomberg showed that market participants expected copper to fall as demand from China, the world's biggest consumer of the metal, could shrink if further steps to combat inflation were to follow.

Zhou from Nanjing Securities said air-conditioner makers' cost pressure would be relieved to a certain extent and they could be expected to present better-than-expected second quarter results.

China Daily

(HK Edition 05/14/2011 page3)