BEIJING (XFN-ASIA) - Lizhong Wheel Group Ltd has shifted production into higher gear as China's demand for cars cruises along even in the face of higher fuel prices.

Zang Ligen, the company's executive chairman, said the Chinese aluminum wheel manufacturer expects second quarter revenues to top first quarter levels as a result of its initial output at the company's plant in Tianjin in north China.

"In the first quarter, we saw quick growth due in part to an expanded product mix. (The newly constructed) Tianjin facility has already begun production, so second quarter revenue will be higher because of this capacity add-on."

Singapore-listed Lizhong previously reported first quarter net profit rose 42.3 pct from a year earlier to 35.2 mln yuan, helped by increased production capacity and strong demand for passenger vehicles in China. Revenue rose 12 pct to 236.1 mln yuan.

The Tianjin plant will cost a total of 780 mln yuan for its three phases with the final phases brought on line in 2009 and 2010.

Lizhong, based in Baoding in north China's Hebei province, sells three-fourths of its output to the domestic market. All of its products are destined for the auto sector, both at home and overseas.

The company's biggest customer is Toyota, supplying the Japanese automaker's Chinese plants indirectly. About 80 pct of all new China-made automobiles from Toyota come equipped with Lizhong wheels.

"We sell the Toyota orders domestically through a joint venture middle supplier," said Zang.

The company has two plants in Hebei and a plant in Huolinguole in Inner Mongolia as well as the new plant in Tianjin.

"We are looking at a possible capacity of one mln units in Inner Mongolia. By 2010, we plan to have 9.6 mln unit total installed capacity per year from all four plants.

"At the end of last year, installed capacity was 3.6 mln. Capacity is now 5.6 mln thanks to our new Tianjin plant which came online last month," Zang said.

Growth will continue to be organic for the time being but eventually Lizhong could look at acquisitions.

"Once these are all on-line, we will possibly look at M&As."

Rising fuel costs are slowing growth in the domestic auto sector overall, however.

In the first half of this year, total domestic car output reached 5.2 mln units, up 16.71 pct over last year, according to the China Association of Automobile Manufacturers. That rate of growth -- while still quite strong -- was down from the 22.36 pct in the same period last year.

So far, Lizhong Wheel has seen no orderbook slump due to slower domestic auto sales or ongoing economic troubles in major export markets, Zang said.

But he did concede that Olympic-related traffic restrictions and high oil prices are both downside risks for car sales and driving in general in China over the next few months.

The company does not anticipate much negative impact from a global economic slowdown. On the contrary, the company may actually increase exports even in the current difficult export climate, Zang said.

"We export around a quarter of our output to Europe, Japan and the US, in that order. The rest is sold to car plants in China and aftermarket retailers here," Zang said.

"Global sluggishness has not yet hit our results because orders take a while to reflect actual supply-demand factors."

He said there are around 100 noteworthy domestic competitors in the aluminum auto wheel sector, and Lizhong is currently ranked third nationwide in terms of output volume.

"But beginning from last year, we were the best performer in our sector in China, especially in terms of efficiency. We have some of the best margins in the sector and are extremely competitive with our overhead and price controls due to very efficient management," Zang said.

Lizhong's exports are dominated by the aftersales market while domestic orders were overwhelmingly destined for new cars.

"About 80 pct of our exports are destined for the aftermarket," he said, noting that most domestic sales are to auto makers with a small proportion going to the aftermarket through a network of retailers in China.

"Our customer base is so large and diverse that a slowdown in one place or another is unlikely to hit our group in a comprehensive way. We really haven't seen any impact on either domestic or export orders from any slowdown anywhere yet," he said.

"While the US and EU are facing slowdowns, we still plan to boost our exports. The EU is our top export market and the appreciation of the euro helps us. But the fall of the dollar has hurt us, of course."

Despite having a 25 pct sales exposure to foreign markets, Zang said that so far the company has not faced any anti-dumping litigation.

He said the company is also coping with sharply rising raw material prices without causing customers to recoil at newly adjusted ex-factory prices.

"Between 70 and 75 pct of our total costs are for aluminum supplies. From the second half of 2006, aluminum prices have been very strong, up 30-40 pct from a year earlier."

But the company has tried to limit the impact by placing large, long-term purchasing orders.

"We fully try to exploit our status as a preferred and long-term critical customer in setting our purchase prices for big aluminum orders, especially in the face of drastic commodity price rises," he said.

Plans by domestic smelters to cut aluminum production cuts to cushion electricity shortfalls and support prices for the metal will not likely hit Lizhong in any significant way due to the non-binding nature of the industry pact, he said.

Earlier this month, China's top 20 aluminum smelters -- including Aluminum Corp of China Ltd (Chalco) -- agreed to cut output between 5-10 pct in a bid to reduce power consumption and push up prices. The 20 smelters account for around 70 pct of the country's total aluminium production.

"The recommended cuts should result in over one mln tons less output this year. I think they are just following expected supply and demand trends going forward. In fact, the cuts will by default address the excess, outdated production that is over and above what the domestic market needs," he said.

"I think this is a product of the big producers looking at domestic market needs, getting together, and trying to orchestrate an outcome most beneficial to the big smelters party to the voluntary output cuts," he said. "But who will adhere to the cuts is hard to say as time passes."

Zang added that Lizhong is totally reliant on aluminum for its raw material needs and sourced the commodity entirely from domestic suppliers.

But makers of steel wheels -- which compete with Lizhong's aluminum products -- are also facing a similar rise in costs.

"But I can say that with the current price of steel, (manufacturers that rely on steel have) have margins that are far lower than ours."

China has tried to limit expansion of major users of energy, such as companies in the metals smelting sector.

But Zang said Lizhong has not been a target of energy regulators given its downstream position on the processing chain.

"We have not been subject to any new electricity use restrictions. As we are classified as a value-added processor so we do not face these power quotas, unlike aluminum and steel plants, which are raw material producers."

Despite not being given quotas for energy use, the company Is still not immune from the electricity tariff hikes faced by all industries.

"There has been one electricity cost adjustment measure taken by the government this year, following one taken last year. The most recent per KwH increases taken by the government have resulted in having 3-4 pct higher power prices, but we didn't raise ex-factory prices in response to this," Zang said.