China is the world's largest auto market, and the global auto industry is increasingly about China. Within three years, China's auto market may grow to be larger than that of the U.S., Japan and Germany combined. For investors who are interested in investing in the auto industry anywhere, the growth potential for companies in China's auto industry exceeds the potential in any other country.
China's auto sales in November grew to 1.79 million vehicles, an increase of more than 11.5 percent from the October sales numbers, and 8.16 percent greater than the sales total for November of last year.
There are numerous ways for investors to participate in China's auto industry. These include investments in automakers, auto parts manufacturers and companies in the auto supply chain.
In this Seeking Alpha article, I'm focusing on three global automakers with Chinese operations, General Motors (GM), Ford (F) and Volkswagen (VLKAF.PK). While none of these companies are 100 percent China auto opportunities, all three have significant operations in China, and have made major commitments to the growth of their companies in the country. I'm also discussing China Automotive Systems (CAAS) and Asia Carbon Industries (ACRB.PK). China Automotive Systems is a leading supplier of power steering components and systems. Asia Carbon Industries is a China based manufacturer of carbon back, a material that is used in the manufacturing of tires.
The Future for China's Auto Industry
McKinsey & Co, the global management consulting firm, has indicated that China's auto market will grow annually by 8% to 22 million annual vehicle sales by 2020. The McKinsey report also stated that the growth in China's auto industry will be led by demand for SUVs, and by first-time purchasers in China's smaller cities. There are differences of estimations as to how large China's auto market will be by the end of this decade. General Motor's Chief Executive, Dan Akerson has stated that China's auto market will reach 30 million annual sales by 2020. In either case, the growth prospects for China's auto industry are impressive.
The smaller Chinese cities referenced by McKinsey are typically referred to as China's third-tier and fourth-tier cities. McKinsey's report indicates that the growth of auto sales in these smaller cities will be due to increases in income and wealth, and millions of first-time purchasers buying their first cars. McKinsey has stated that these third-tier and fourth-tier cities will account for almost 60% of new car sales by 2020, up from around 40% during the first decade of this century. Even with their projections for the growth in auto sales in China, the authors of the McKinsey report, Arthur Wang, Wenkan Liao and Arnt-Philipp Hein, indicated that China's car ownership will only be at half of that of the U.S. by 2020.
Among all types of autos, McKinsey's report stated that SUV sales will triple for the 10 year period ending in 2020. McKinsey indicated that the increase in SUV sales will be propelled by higher wealth and income, resulting in many Chinese wanting larger cars.
As a confirmation of the commitment to their growth potential in China, over the past two years China's top ten automakers have announced more than $38 billion in capital investments.
General Motors, the largest foreign automaker in China, reported that its November sales in China increased 9.7%, to 260,018 units. The company indicated that the increase in sales was primarily due to high demand for its Chevrolet and Buick models. Buick sales in China alone increased 17%. Through November, the company's deliveries rose approximately 10% to 2.59 million units, exceeding the number of deliveries for all of 2011. Confirming its commitment to China, General Motors also announced its intention to invest as much as $7 billion for the five-year period ending 2015.
General Motors has a total of twelve joint ventures in China. The company sold more than 2.5 million vehicles in China last year, a total that exceeds that of its global rivals, Toyota Motor Corp. and Volkswagen.
GM's joint venture with China's SAIC Motor Corp. sold a total of 136,444 vehicles last month, up 21 percent from the number sold in November of last year.
Ford Motor Company
In November Ford sold 67,505 vehicles in China, a monthly record, and an increase of 56 percent over the number sold in October. Through November, Ford's year-to-date sales are up 18 percent.
In commenting on its November China vehicle sales, John Lawler, chairman and CEO of Ford Motor China stated,
We're grateful that so many Chinese consumers appreciate the value, performance and technology of the Focus, making it the best-selling passenger car in the world's largest auto market. Our plan to introduce 15 new vehicles by 2015 is on track, and with the launch of the Ford Kuga and EcoSport SUVs, we're going to make more inroads into China's fastest-growing segment as we work to double our production and retail capacity by 2015.
Sales of Ford's Focus model in China during the month of November broke records. A total of 38,362 Focus autos were sold in November. The total Focus sales for the first eleven months of this year was 259,492 vehicles.
Two models, the Edge and the Mondeo models also showed huge growth. For the first eleven months of this year, sales of Edge model were up 111%, while sales of Mondeo models were up 8%.
Changan Ford Automobile Ltd., Ford's passenger car joint venture in China, also had a record month in November. The joint venture sold 50,423 cars in November, up 71% compared to the total sold during the month of November 2011.
China is Volkswagen's largest market. Volkswagen's China sales for the third quarter of this year increased by 21 percent to 704,991 vehicles. Volkswagen's growth rate for the quarter almost tripled the growth rate of its rival General Motors. Volkswagen's sales for the quarter were also sufficient to surpass GM's sales for the quarter of 664,765 vehicles. Through the third quarter of this year, GM was still in the lead for Chinese year-to-date sales by a slim margin of approximately 77,000 vehicles. But, it must be recognized that China and Volkswagen calculate their China sales differently. General Motors includes truck sales, but excludes sales in Hong Kong and Macau. Volkswagen doesn't include truck sales, but does include Hong Kong and Macau sales.
For the first nine months of this year, Volkswagen had five of the ten best-selling autos in China, while General Motors had three.
China Automotive Systems
China Automotive Systems, Inc. is a leading supplier of power steering components and systems to China's automotive industry. The company provides its customers with a full range of steering system parts for passenger automobiles and commercial vehicles. China Automotive Systems' operates in China through ten Chinese-foreign joint ventures.
The company's market capitalization is $135 million and its P/E is 6.76.
For the September 30th quarter, the company's sales increased to $73.2 million, an increase of 3.2 percent compared to the third quarter of last year. For the quarter, 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 2011. The company's gross profit was $43.5 million, compared to $45.1 million for the 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 were $0.52 for 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, China Automotive Systems is well positioned to increase its profitability as China's auto industry continues to grow.
Asia Carbon Industries
Asia Carbon Industries is one of the top ten carbon black producers in Shanxi province, China's highest coal producing 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 therefore 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 if the company is able to continue to grow as China's tire and auto industries continue to grow.
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 quarter of 2011. Net income for the quarter increased 11% to $1,697,915 from $1,527,662 for the same quarter of 2011. Earnings per share were $0.03 for the both the three months ended September 30, 2012, and 2011.
The growth of China's auto industry is compelling for investors. While there are many opportunities to participate in the growth of China's auto industry, General Motors, Ford, Volkswagen, China Automotive Systems and Asia Carbon Industries are all well positioned to continue to grow their China operations as the country's auto industry grows.
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 United States 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.
The Securities and Exchange Commission has charged five China based affiliates of major auditing firms with violations of the U.S. securities laws. The lack of a resolution of the SEC action can have a major impact on U.S. listed companies with China operations, including General Motors and Ford. However, many acknowledge that it's in China's and America's best interests to resolve what many see as a political dispute, sooner rather than later.
Disclosure: I am long ACRB.PK.