American manufacturing, which has been a source of U.S. economic strength for much of the past three years is continuing to face challenges. U.S. manufacturing is soft, capital investment is slowing, and the overall prospects for the U.S. economy remain lackluster.
For the most part, the U.S. economy is moving along at a pace that is a disappointment to many of us. Compounding this minimal growth environment are concerns about the fiscal cliff, and with it the possibility of $607 billion in automatic tax increases and spending cuts starting in 2013. While there is hope that the fiscal cliff will be averted with a likely compromise that neither American political party will be happy with, there are no guarantees that this will occur.
A bright spot in the otherwise lackluster U.S. economy is America's auto industry. Data provided by Ward's Automotive Group indicated that October U.S. auto sales were at an annual rate of 14.22 million vehicles, after climbing to 14.88 million vehicles in September. U.S. auto sales in September were the strongest since March of 2008.
But, the real global auto industry story is one that is about China, which continues to be the world's largest auto market. The China Passenger Car Association has published data indicating that 18.5 million vehicles were sold in China last year. Confirming the size and importance of China's auto market, General Motors' (GM) Chief Executive, Dan Akerson, has indicated that the country's auto market will reach 30 million annual vehicle sales by 2020.
I have previously highlighted not only why Chinese equities listed in the United States should be of interest to American investors, but why companies tied to China's auto industry should be of special interest.
This brings me to two companies that are tied to China's growing auto industry, China Automotive Systems (CAAS), and Asia Carbon Industries (OTC:ACRB), both of whom I've written about previously here at Seeking Alpha, and who recently announced their third quarter financial results.
China Automotive Systems
Based in Hubei Province, China Automotive Systems, Inc. is a leading supplier of power steering components and systems to China's automotive industry. The company operates through ten Sino-foreign joint ventures. China Automotive Systems offers a full range of steering system parts for passenger automobiles and commercial vehicles.
China Automotive Systems has a market capitalization of approximately $137 million and its P/E is 6.96.
I've written here at Seeking Alpha about China Automotive Systems, so I was anxiously awaiting the company's third quarter results. For the September 30th quarter, the company's sales increased to $73.2 million, a 3.2% increase, compared to the third quarter of last year. The company's gross profit was $12.5 million, compared to $12.6 million in the third quarter of 2011. The company's net income was $4.4 million for the quarter, compared to $11.1 million for the corresponding quarter of 2011. The company's earnings per share for the quarter were $0.12, compared to $0.09 in the third quarter of 2011.
For the first nine months of this year, China Automotive Systems' sales were $234.5 million, compared to $235.5 million for the first nine months of last year. The company's gross profit was $43.5 million, compared to $45.1 million for first nine months of last year. The company's net income, which includes net income from discontinued operations, decreased for the first nine months of this year, to $14.7 million from $30.3 million in the first nine months of 2011. Diluted earnings per share was $0.52 in the first nine months of 2012, compared to diluted earnings per share of $0.50 for the first nine months of last year.
While the company's net income for both the quarter and the first nine months of this year are disappointing, I am optimistic as to the company's prospects for the fourth quarter of this year. More importantly, China Automotive Systems is well positioned to take advantage of the likely future growth of China's auto industry in a good market niche.
Asia Carbon Industries Inc.
Established in 2003 in Shanxi, China's highest coal producing province, Asia Carbon Industries is one of the top ten carbon black producers in its province. With the rubber industry utilizing almost 90% of the worldwide output of carbon black, most of Asia Carbon's revenues and growth are tied to China's tire industry, and as a result directly to China's auto industry.
Despite the company's strong financial performance, the company is for the most part unknown and undiscovered by investors. The fact that Asia Carbon's shares are trading at a P/E of 1.05 is a confirmation that the company is not on the radar screen of investors. Although in recent months the trading volume of Asia Carbon's shares has increased substantially, the company could definitely be considered an orphan stock. It's likely that investors will start to take notice of this company over time, especially as it remains likely to generate good financial results.
Asia Carbon Industries' revenues for the three months ended September 30, 2012 increased 15% to $12,699,296 from $10,997,216 for the same period last year. The company's gross profit increased 3% to $2,700,188 in the quarter from $2,632,928 for the same period in 2011. Net income for the quarter increased 11% to $1,697,915 from $1,527,662 for the same period in 2011. Earnings per share were at $0.03 for the both the three months ended September 30, 2012, and 2011.
Both China Automotive Systems and Asia Carbon Industries will benefit from the improvement of China's economy, and the continuing growth of the country's auto industry. Both companies are also beneficiaries of the May 2012 incentive program announced by China's central government that has benefited both low-emission and fuel-efficient cars.
China's September announcement of an infrastructure stimulus program totaling US$158 billion, with its focus on the domestic economy, should stimulate consumer spending and the country's important manufacturing sector.
China watchers, myself included, are optimistic that the country's recently chosen seven-member Politburo Standing Committee and its new senior leadership will push ahead with critical private sector and consumer growth policies essential to the future of the world's second largest economy. With these leadership changes, I expect additional measures will be taken to stimulate China's economy starting early next year, likely before the Chinese New Year.
A beneficiary of the current as well as new economic stimulus programs will be China's auto industry.
Investing in smaller-capitalization companies, as well as investing in companies in emerging markets including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.
Both China Automotive Systems and Asia Carbon Industries are smaller capitalization companies with operations based in China. But these companies, which are traded in the U.S. are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.