HondaNet profit of Honda Motor Co. surged during its fiscal second quarter on the back of strong sales in China, making the company raise profit forecast for the full year.

The Japanese automaker (HMC) revealed on Monday that its net profit soared to 177 billion ($1.7 billion) during the July-September quarter, a jump of 39 percent from the same period a year ago. This was driven by enhanced demand for its sport utility vehicles (SUVs) in China, it second-largest market.

Honda says it now expects to sell 4.98 million vehicles in the fiscal year ending March 31, up from the previous estimate of 4.92 million.

Operating profit is now expected to come in at 650 billion yen for the year, up from an earlier estimate of 600 billion. Net profit forecast for the fiscal full year has been boosted to 415 billion yen ($3.96 billion), up from the estimate of 390 billion yen provided in May.

Demand for the carmaker’s Vezel and XR-V SUV models was high during the quarter, with deliveries of each one raised by over 50 percent in China. This has caused the company to start considering further production expansion in the world’s largest auto market, with work to begin on a new plant in 2016.

The market in China was significantly boosted by the introduction of a tax cut for vehicles with smaller engines last year. Sales of smaller-engine vehicles accounted for a large part of the 26 percent expansion recorded by Honda in the Chinese market during the last quarter.

“Their redesigned models, especially the small crossovers, are giving them a strong boost,” explained Seiji Sugiura, a Tokai Tokyo Research Center analyst. “We expect the Chinese government to take some action, further supporting the industrywide growth, and Honda will continue to benefit.”

The sales tax cut, introduced after a slump in China’s automotive market last year, has led to a 15 percent jump in passenger-vehicle sales to 16.75 million units in the first three quarters of 2016. It is set to expire at the end of this year, but the government of the country is considering a possible expansion, according to Bloomberg.

Huge demand in China helped Honda to bounce back from a disappointing April-June quarter when its profit slumped by 6 percent, hurt by massive recalls of defective airbags at its supplier Takata Corp.

The Takata airbag inflators, which use ammonium nitrate to fill airbags, can deploy too forcefully in some cases, blowing a metal canister apart and spraying vehicle occupants with shrapnel. They have been linked to at least 15 deaths across the globe.

Honda said it was still unable to fully anticipate total costs of the airbag recalls.

The improved profits could have been even greater if not for a stronger domestic currency that dragged down sales to 3.26 trillion yen ($31.1 billion), nearly 10 percent down from a year ago.

The yen has appreciated roughly 15 percent against the American dollar in 2016, negatively impacting the repatriated earnings of Japanese exporters.

The Tokyo-based automaker said its operating income was cut by 178 billion yen during the first half of its fiscal year as a result of foreign exchange changes.

Honda sales have climbed 3.3 percent in the U.S. this year.

November 3rd, 2016

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