Chinese carmaker, Geely Automobile Holdings said Volvo, which it is in the process of buying, could break even as early as the fourth quarter, after posting a surprise drop in its own second-half earnings.

Hong Kong-listed Geely shares fell 6 percent in their biggest drop in more than two months, hitting a 5-week low, before closing down 5.3 percent to HK$3.95.

The market was expecting growth, so to see a fall in profit is disappointing for some funds, said Peter Lai, director at DBS Vickers, adding the stock still remained a good medium-term buy.

It's likely to re-list Volvo soon, which will mean a lot of cash for them over a long period of time, Lai said.

Geely's parent, China's biggest private carmaker, signed a definitive agreement late last month to buy Ford Motor Co's Volvo car unit for $1.8 billion. Both Geely and Ford had said they hoped to complete the deal in first quarter.

Geely Chief Executive Gui Shengyue predicted the Swedish premium brand could break even as early as the fourth quarter of 2010.

As far as I know, Volvo is in good operating condition and it's possible it could break even in the fourth quarter of this year, Gui told reporters in Hong Kong.

Geely has the right of first refusal to buy Volvo from its parent once the deal closes, said Gui. However, he added the listed company would likely wait until Volvo had added production capacity in China.

Owning a global brand would give Geely a chance to build its profile in China, where it is known for smaller, cheaper cars, and to catch up with bigger state-owned rivals that have partnered global brands including GM GM.UL and Volkswagen.

SLOWER GROWTH AHEAD

Geely's sales rose more than 60 percent to around 100,000 units in the first quarter but the company kept its 2010 sales target at 400,000, up 22 percent from 2009.

Like other Chinese automakers, Geely's sales will remain healthy this year, but it's just unrealistic to repeat last year's breakneck growth, said Zhang Xin, a Beijing-based analyst with Guotai Junan Securities.

Geely sold 326,710 million sedans last year, an increase of 60 percent, pushing its market share above 4 percent.

The carmaker is also due to decide soon on whether to take a controlling stake in loss-making London black cab maker Manganese Bronze. The taxi maker said last month it was considering a placing of new shares to Geely, which already owns a 20 percent stake.

Geely's second-half net profit dropped to 587 million yuan ($86 million) from 636 million yuan a year earlier, according to Reuters calculations based on the company's earnings statement.

Analysts had predicted a second-half profit of 804 million yuan, according to forecasts on Thomson Reuters I/B/E/S.

Its gross profit margin last year was 18.1 percent, lower than my forecast of 20 percent, said Rebecca Tang, an analyst at CIMB-GK.

Core second-half earnings actually rose by around 50 percent from the same period a year earlier when net profit was boosted by one-off items.

Costs last year were inflated by starting new plants and by the acquisition of Australian automatic transmission supplier Drivetrain Systems International, Tang noted.

China, which last year overtook the United States as the world's biggest car market, has been a bright spot for global automakers battered by the industry's worst downturn in a generation. A massive stimulus package from Beijing included aggressive cuts in the sales tax on small cars.

At Monday's close, Geely shares were down more than 8 percent for the year so far, trailing the broader market's 2 percent gain. Geely soared nearly seven-fold last year on bullishness about its parent's plans to buy Volvo and on an investment in the company by Goldman Sachs.

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