Chinese Automotive Systems, Inc. (CAAS), a leading supplier of power steering components and systems for Chinese passenger automobiles and commercial vehicles, announced preliminary unaudited selected December 2010 quarterly results before the market open Friday. Its customer base includes leading Chinese auto manufacturers, including BYD Auto Company Ltd (BYDDY.PK), China FAW Group, Corp., Dongfeng Auto Group Co., Ltd., Beiqi Foton Motor Co., Ltd., and Chery Automobile Co., Ltd.
Revenue is reported to come in at $100.5 million for the quarter, ‘handily’ beating analyst consensus estimates of $90 million; for the fiscal year ending December 2010, revenue has grown to $345.9 million. This would make both the December 2010 quarter and the FY 2010 by far their strongest quarter and year-to-date periods respectively. The company has grown both the December 2010 quarter and FY revenues at a 40%-42% average annual ‘clip’ over the last five years since 2005. The company also reports preliminary operating income at $12.3 million in the December 2010 quarter, indicating that earnings may come in at 26-27c per share, beating 25c analyst estimates. Margins were weaker than the company had projected earlier on November 9, 2010, but share prices had fallen from almost $18, factoring in most of the projected decline in margins.
Going forward, the company projects 20% annual revenue growth, which works out to be $415 million for FY 2011, above the $398.6 million analyst estimates. Based on the company’s operating model, adjusted for lower margins going forward, we estimate that earnings for FY 2011 could come in between $1.40-$1.50 per share, well north of current $1.22 analyst estimates.
At Friday’s closing price of $10.79, CAAS shares are still trading at a respectable 7-8 P/E, and can be considered for longer-term investment based on the company’s historical growth and their forward projections, and given the projected growth in the Chinese economy and their automobile industry. Also, the company indicated that the accounting issues and restatements announced earlier last month were non-cash in nature and will not affect the company’s operations.
Institutions have been net buyers of the stock recently, with 62 institutions holding a total of 2.1 million shares, or 7% of the shares outstanding shares, up from 4% in the prior period. Of the seven analysts covering the stock, all seven recommend it as a buy, and on average, expect an upside to $16.60, 54% above Friday’s closing price of $10.79.
Shares ‘popped’ higher on news of the current quarter revenue beat, the raising of forward projections, and the statement about accounting statements, rising as much as 42% on Friday to $11.59 intra-day before settling down to close up 33% at $10.79.
The shares of two other Chinese auto suppliers, SORL Auto Parts Inc. (SORL) and Wonder Auto Technology, Inc. (WATG) also ‘popped’ higher on unusually high volume on the positive news from CAAS. Shares of all three, CAAS, SORL, and WATG, have been in a steep decline since the November 9th news from CAAS on weaker margins and have all lost roughly half their value since then.
SORL Auto Parts Inc. (SORL) is a leading supplier of automotive brake systems and other key safety related auto parts to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally. The company’s products are principally used in different types of commercial vehicles, such as trucks and buses.
In the latest December 2010 quarter, SORL reported $54.8 million revenue and 31c earnings per share, significantly above analyst estimates of $50.7 million and 23c. The company projected the March 2011 quarter at $50 million revenue and $4.6 million net income or 24c in earnings. Also, current analyst projections for FY 2011 are at $282.7 million revenue and $1.33 earnings, and with the stock trading at $5.75 at Friday’s close, it is trading at between 4 to 5 Forward P/E. We believe that shares are likely to outperform going forward.
Institutions have been net buyers of the stock recently, with 43 institutions holding a total of 2.84 million shares, or 15% of the shares outstanding shares, up from 13% in the prior period.
Also, of the seven analysts covering the stock, six recommend it as a buy and one a hold; and on average, analysts expect an upside to $13.60, 135% above Friday’s closing price of $5.75.
Wonder Auto Technology, Inc. (WATG) is a leading manufacturer of automotive electric parts, suspension products and engine components for passenger vehicle and commercial vehicles in China. Their core products include alternators, starters, engine valves and tappets, and rods and shafts for use in shock absorber systems.
According to the China Association of Automobile Manufacturers, or CAAM, in 2008, WATG ranked second and third in sales revenue in the Chinese market for automobile alternators and starters, respectively. Also, their subsidiary Jinan Worldwide, which was acquired in October 2008, has been producing engine valves and tappets for over 50 years, and the company believes that they are now one of the largest manufacturers of engine valves and tappets in China in terms of sales volume as a result of the acquisition.
Like CAAS, WATG is also in the process of re-stating its financials and is currently delinquent in its filings with the NASDAQ. In its latest September 2010 quarter, WATG reported $78.8 million revenue and 40c earnings per share, significantly above analyst estimates of $72.6 million and 22c. Also, it has projected FY ending December 2011 at $445-455 million in revenue, well above $211 million it reported for the latest FY 2009 and also above estimated $309.7 million analyst estimates for FY 2010.
Also, current analyst projection for FY 2011 are at $1.24, and with the stock trading at $5.40 at Friday’s close, it is trading at between a 4-5 Forward P/E. We believe that shares, while cheap, are less attractive than its two peers, CAAS and SORL, and that the stock may underperform relative to those two peers until it issues an update to its financial statements to FY 2008 and FY 2009.
Institutions have been unloading the stock recently, with 90 institutions holding a total of 10.2 million shares or 30% of the shares outstanding shares, down from 42% in the prior period.
Also, of the seven analysts covering the stock, six recommend it as a buy and one a hold; and on average, analysts expect an upside to $12.80, 137% above Friday’s closing price of $5.40.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online® and Zacks Investment Research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Material presented here is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion.