China Automotive Systems (CAAS) is a supplier of power steering components for the Chinese automotive market and the company is currently expanding into the North American automotive market. 2013 has been a great year for the company so far. The stock has rocketed up by 52% so far in 2013. Based on long-term trends in the Chinese automotive market and positive developments in 2013, the stock is set for a great 2014.
|TTM Price to Earnings Ratio||8.70|
|Quarterly Earnings Growth (yoy)||153%|
|Average Volume (3 months)||121,303|
Recent Company Developments
The Chinese car market's growth is one of the great secular growth stories of our day. The Chinese automotive market will only to continue to grow for the foreseeable future due to the growth of the Chinese middle class. Despite this growth, China's auto market still has room to grow. As shown in the graph below, passenger vehicle penetration is still somewhat low compared to other nations such as the U.S. and Japan. In addition, the Chinese auto market will nearly double by 2019. Also, growth in the Chinese car market remained strong in November 2013 and sales rose by 15%. The U.S. market will grow in this time too, but not at the same rate as China due to saturation. China Automotive Systems is based in China and has the potential to benefit from the growth because of its location.
Source: graph from The Boston Company
2012 and 2013 have both been excellent years for the company. The company reported numerous positive developments for 2012 in its 2012 annual report. Net sales grew by $6.2 million, despite the fact that the Chinese economy grew at its slowest pace in 13 years in 2012. The company had a great deal of success in penetrating the North American auto market during the past few years. Importantly, Chrysler (CGC) became the company's largest customer during in 2012. As shown in the chart below, Chrysler represented 11.7% of the company's total revenues in 2012. Also in 2012, a China automotive subsidiary, Hubei Henglong, was named National Excellent Supplier of Steering Systems" in China by China Automotive News. Although 2012 turned out to be a great year for the company, 2013 is shaping up to be an even better year for the company. In January, China Automotive Systems' test center became the first test center of its kind to be accredited by the Chinese government. Also in January of this year, the company won the 2012 Chrysler China Regional Excellent Supplier award. The company entered a multi year agreement to supply the SAIC-GM-Wuling joint venture in the spring of 2013. General Motors (GM), a company involved in this joint venture, reported record sales in China in 2012. In September 2013, the stock was added NASDAQ Golden Dragon China Index. This is a very key development. The index is described as offering "unique economic and investment opportunities in China while providing the transparency offered by U.S. listed securities." This will only help to increase awareness of the company in the U.S.
Source: table from China Automotive Systems' 2012 Annual Report
Q3 2013 Highlights
The company reported a phenomenal third quarter this November. The company reported record net sales in Q3 2013. The first nine months of 2013 was much better than the first nine months of 2012. Net sales, gross profit and operating margin all grew compared to 2012. Cash and cash equivalents and short-term investments did decrease compared to the first nine months of 2012, but this only decreased from $87.6 million to $87 million. In addition, the company announced in its Q3 conference call that it used its strong financial position to temporarily increase R&D spending by 88.1%. During Q3, the company maintained zero long-term debt. The company's sales growth was 24.2% in the third quarter of 2013, which outpaced the 13.6% growth for total Chinese vehicle sales. China Automotive Systems' primary customer, Chrysler, has now grown for 42 consecutive months. The sales of SUVs and Trucks in China also looks very strong with companies like Great Wall (OTCPK:GWLLF) posting a 42% increase in SUV sales in Q3. Great Wall Motors is a customer of China Automotive Systems and Great Wall is expected to begin selling cars in the U.S. market in 2015.
Growth in the Chinese automobile market has been very volatile in recent years. Since China Automotive Systems business is built around the total sale of Chinese vehicles any slight decrease in the growth of Chinese automobile sales could have a very bad effect on the stock. Also, the stock has been extremely volatile in recent months. The beta is 2.63. As shown in the chart below, the stock has been in a range between $6.07 and $10.00 in just the past 6 months alone.
Source: chart from Yahoo! Finance
1. Overall, China Automotive Systems does have a favorable risk to reward ratio in my opinion. The Chinese auto market is expected to double by 2019. China Automotive Systems sales are strongly correlated with total vehicle sales, so the stock should perform well if Chinese auto sales continue to grow. A potential catalyst for the company would likely be an increase in Chinese car sales in 2014. An increase in Chinese car sales could be triggered by an overall increase in the Chinese economy or by Chinese consumers swapping their old cars for new fuel efficient ones.
2. The stock has very strong fundamentals. Sales growth has been high at 24.2% for Q3. The stock has a low PEG ratio, P/S ratio and P/B ratio. These could all be signs that the stock is undervalued.
3. China Automotive Systems' largest customer is Chrysler, which has grown for over 42 consecutive months. Chrysler also gives China Automotive Systems access to the North American market.
4. The company temporarily increased R&D spending by 88% due to the company's healthy financial position.
5. The company currently has no long-term debt.
6. Q1 2013 was a record first quarter. Q2 2013 was a record second quarter. Q3 2013 was a record third quarter. Overall, 2013 has been a great year for the company.
Source: data from Yahoo Finance