July 6, 2018 / 10:48 AM / 5 months ago

UPDATE 2-Assa Abloy to take a near $700 mln writedown in China

* Writedown related to acquisitions in China

* Says China market remained weak in Q2

* Does not see further falls in China margin (Adds CEO comment, background)

By Daniel Dickson and Simon Johnson

STOCKHOLM, July 6 (Reuters) - Swedish lock maker Assa Abloy will take a 6 billion crown ($686 million) writedown on its Chinese business in its second quarter results due to a faltering market, expensive acquisitions and higher metals prices.

Assa has had problems in China for years and took a small writedown in early 2017, but said on Friday it remained committed to a country where it sees long-term growth outpacing the rest of Asia.

Acquisitions, including steel security door maker Pan Pan, were made at the top of the market and in a part of the country where demand has been particularly weak.

Some executives at newly bought firms had inflated sales and Assa has been focused on sorting out internal problems and not developing its business, CEO Nico Delvaux said on a call with analysts.

“And on top of that we got the material price increases. In a way it was a perfect storm for those acquisitions,” he said.

Assa shares were down 7.3 percent at 1042 GMT, versus a 0.5 percent fall in Stockholm’s blue-chip market.

China has enjoyed a construction boom in recent years, but Assa’s exposure to the slower growing north of the country and its concentration on steel doors rather than more profitable locks and security devices has left it lagging.

Assa has been reporting weak demand in China since the end of 2014.

Delvaux said signs at the end of last year that the market was starting to turn around had proved a false dawn.

“What we have seen in quarter two is that there is not the recovery that some people were hoping for ... toward the end of last year,” he said. “We see now after six months in 2018 that that is not the case for our business.”

He said very low single-digit margins in China were not expected to fall further. “But it will take a longer time for the margins to go up to levels we expected previously.”

Assa said one-off costs of 5.6 billion crowns were due to impairments of goodwill and other intangible assets, while 400 million crowns related to writedowns of operating assets.

China is currently a relatively small market for Assa, making up around half of its Asia-Pacific business, which had sales of 9.2 billion crowns in 2017.

The company said overall sales in the second quarter increased 9 percent to 21.1 billion crowns and that adjusted operating profit, excluding the one-off costs, rose to 3.3 billion crowns from 3.1 billion in the year-ago quarter.

The adjusted operating margin was 15.7 percent, down from 16.1 percent, while organic sales growth was 5 percent, up from 2 percent a year earlier.

$1 = 8.7849 Swedish crowns Reporting by Simon Johnson and Daniel Dickson; Editing by Elaine Hardcastle and Mark Potter

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