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SORL Auto Parts, Inc. (NASDAQ:SORL)

Roth Capital Conference

February 21, 2007 1:30 pm ET

Executives

David Ming He - Senior Manager of Investor Relations

Presentation

Moderator

Our next present company is SORL Auto Parts located in Zhejiang, China. It's pretty close to Shanghai. And joining us today is David He, CFA, CPA, and Senior Manager in charge of Investor Relations. So, take it.

TRANSCRIPT SPONSOR

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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David Ming He

Thank you, Joe. Good morning, ladies and gentleman. Thank you very much for your interest in SORL. We are SORL Auto Parts Inc., a leading manufacturer for commercial vehicle air brake valves in China and the management believes that the company holds number one market position in this particular segment in China.

Our predecessor is Ruili Group, which was founded by Mr. Zhang and his brother 20 years ago and we were spin-off from the Ruili Group three years ago.

Our sales revenue was $47 million in '04 and increased to $64 million in '05 and $79 million for the last 12 months ending September of last year, out of which exports have grown much stronger with only $12 million in '04 and increased to a $23 million in '05. For the last 12 months ending September of last year, the export sales reached $31 million.

We are based in Wenzhou City of Zhejiang Province in the east coast of China, which is known as the hub of auto parts in China with over 1,000 various auto parts manufacturers in this area and we are the largest one among them. Ending September last year, we had about 13,000 employees and we are recruiting more along with the expansion of the company.

This is the picture of our current production site, which we leased from the Ruili Group, covering a total space of 270,000 square feet. With the proceeds that we raised in the public offering last year, the company is constructing a brand new plant, which will be a couple of miles away from the current one and twice the size of the current one.

These are some pictures of our current production sites. We have a total of 15 production lines. It comprises of modern testing facilities and manufacturing equipments, mostly imported from the US, Korea, and Taiwan.

We are proud that we have obtained the ISO/TS16949 certification, which represents by far the highest standards for the industry, and we also have obtained other certifications in the health and safety management and environmental management, et cetera.

Here are some examples of our major products. We offer high-quality low-cost products, and we produce a total of about 40 categories of air brake valves in over 800 specifications and the company focuses on the R&D efforts.

Currently, we have four patents, plus eight currently under application and pending approval, and besides we have also other proprietary technologies and know-how in our production.

We have an aggregate of 44 technical staff, out of which 32 have Engineer or Senior Engineer designations. In addition, the company also cooperates with leading automotive engineering universities in China in the R&D efforts.

These two pies are a breakdown of our sales revenue in the year of '05. We had 32% of our total sales revenue from the Chinese OEM market segment, and 32% from the replacement market in China, and 36% for the exports. Actually, for the nine months in last year, the breakdown was about 30%, 30%, and 40% in these three segments. The Asian market has accounted for about 42% of the total export sales in the year of '05.

In China, the local OEM dominates the truck market with about 90% market share, that's basically attributed to the fact that the Chinese trucks are less expensive and are more durable. We have established lasting relationships with all the major truck makers in China, including the China FAW Group, which is the largest automaker in China, and also Dongfeng Motors and DaimlerChrysler.

For aftermarket, we have a well established distribution network all over the country and international sales basically goes through the aftermarket, but from last year, we have Tata Motors in India as our first international OEM and Tata Motors is an [additive] to the DME in India, which has about $5.5 billion of annual sales.

Here are some figures of our major customers in China. We are the main supplier to those companies. For example, for FAW Qingdao, we supply through them for the share of 40% of the total air brake valves that are used. For Liuzhou Special Auto Company, we have 50% of the total valves that it purchases.

From the table on the left, it’s the top ten heavy duty truck makers in the world, and out of which three of them are our major OEM customers, and we have supplied to almost all the major heavy duty truck makers in China.

Our aftermarket sales revenue was about $12.2 million in '04, representing about 26% of the total sales revenue in that year and it increased to $20.2 million in '05 or 32% of the total sales in that year. We have about 27 authorized distributors and in turn our products are channeled to more than 800 sub-distributors all over the country. We have strong competitive advantages over other smaller air brake valve manufacturers in China.

Export is the main driver of the growth of the company. In year of '04, we had about $12.6 million from export, representing 27% of the total sales revenue in that year, and it increased by 83% to $23.4 million in '05 or 36% of the total revenue in that year. As I just mentioned, the exports basically goes through the aftermarket, but from last year, we Tata Motors as our first OEM customer overseas.

We have three authorized sales vendors in the world located in Australia, Dubai of UAE, and Los Angeles of the States. Our sales revenue through the top ten export customers continued to grow in the past year.

There would be great growth opportunities for the company, both in China and internationally. China's global auto part sales totaled $55 billion in '04 and this figure is forecasted to reach 187.5 billion by the year of 2010, out of which export is expected to grow at a much stronger rate at about 50% per year.

The truck prices in China are less sensitive than the passenger vehicles, basically due to the fact that the domestic brands are about 50% lower than the imported heavy duty trucks.

In China, the truck market depends more on the macroeconomic environment and the government policy. The fact is that the Chinese government is encouraging the infrastructure construction in China, evidenced by the government's 11th five-year plan, which says that during the years between '06 and 2010, the highway expansion will increase by 38%.

Also, the Ministry of Construction in China plans to complete a national highway system before the grand opening of the Beijing Olympic Games in '08. So, all these constructions will demand more and more heavy duty trucks and hence there will be stronger demand for air brake valves that we produce.

Also, with the current construction of the national highway system, we expect that the truck transportation will gradually takeover the market share from other means of transportation such as the railway transportation.

From January to October of '06, China exported a total of 128,000 trucks to the rest of the world for a total value of $788 million, representing 50% year-over-year growth. And also, China exported about 21,800 buses, representing 150% year-over-year growth, reaching $427 million.

From the chart on the left, we can see that in the past years China auto parts exports has been growing significantly with the year of 2005. For the first year, exports exceeded imports. And the major export markets are the Middle East and Southeast Asian countries.

The current global market size for commercial vehicle air brake valves that we produce is estimated over US$5 billion, and aftermarket growth rate is estimated at about 15% per annum.

Obviously, the global purchasing trend, which includes those developing countries, especially China, for our company, export sales as a percent of the total sales revenue was only about 18% in the year of '03 and increased to 40% of the total sales revenue for the nine months of last year.

The growth strategy of the company for the local domestic Chinese OEM, we will continue to enhance our brand recognition and to establish additional relationship with the newcomers in the truck market. Exports strategy is to start with the aftermarket to build up our brand recognition, our market image of high-quality low-cost products and establish our sales networks, and then gradually moves to the international OEMs.

As I just mentioned, we are located in Wenzhou, where it’s known as the hub of auto parts in China with over 1,400 various auto parts manufacturers in this area and those companies could potentially be our M&A target.

And our Chairman and CEO, Mr. Xiao Ping Zhang is also the President of the local Association of Auto Parts Manufacturers. He has a very good connection within this community. We will continue our R&D efforts and the cost control efforts in our future growth.

Some financial highlights of the company, from these two charts we can see the tremendous growth in the past three years in both revenue and net income. We have achieved CAGR of 39% in sales revenue and CAGR of 107% in the net income in the past three years.

For the nine months in the year 2006, the total sales revenue reached $60.8 million with a net income of $5.7 million, representing about 30% increase compared to the same period in '05. And for the last 12 months ending September of last year, total sales reached to $79.2 million with $6.4 million of net income or earnings per share on a diluted basis of $0.47 compared with $0.38 of earnings per share for the whole year of 2005.

We have maintained a strong balance sheet. In the nine months of last year, we significantly improved our cash position, reduced our [certain] debt, and constantly increased the shareholder's equity.

The company has a strong industry-leading management team. Our Chairman and CEO, Mr. Xiao Ping Zhang is the Founder of our predecessor, the Ruili Group, and he is meanwhile also the President of the local Wenzhou Auto Parts Manufacturers Association, and meanwhile he is also the Vice President of the national-level association of this kind.

Mr. Xiao Feng Zhang, his brother, is the COO of the company, and both of them have more than 20 years of experience in this industry. Our CFO is Ms. Zong Yun Zhou, she is Chinese CPA and she has got great insights and experience in auto parts industry.

And myself, David He, I am the Senior Manager in charge of the Capital Market Operations and Investor Relations. I have obtained the CFA and CPA designations, and I own my MBA degree in Finance and a Master of Science degree in Accountancy from the University of Illinois at Urbana-Champaign. And before which, I had seven years of banking experience with Credit Agricole Indosuez, now it's renamed Calyon, the largest French bank in Shanghai.

A summary of our investment highlights. There will be great market potential for our products. Currently, China is the world's second largest auto market and it is the third largest auto manufacturing country in the world. And there will be great export potential for our company.

The current global market size for a commercial vehicle air brake valves is estimated over US$5 billion, and through expansion into additional product lines, including but not limited to those auto parts for passenger vehicles and also through opportunities of acquisition activities, the company is expected to grow faster.

We are the industry leader. We believe we hold a number one market position in commercial vehicle air brake valves in China for both the OEM market segment and the replacement market segment. And we have solid operating history with strong financials evidenced by a CAGR of 37% year-over-year growth in past years.

We have also successfully expanded into the international market, thanks to our superior performance of [cost ratio product] and our achievement of having obtained a global ISO certification.

We have a strong brand name, the SORL trademark has been awarded as one of the top and most recognized brand names in the auto parts industry in China.

Thank you very much for your time and please feel free to raise questions. Yes, please.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible]

David Ming He

Well, we don’t particularly provide forecast or guidance, but we are confident that the company will continue to grow as we did in the past.

Unidentified Audience Member

[Question Inaudible]

David Ming He

You mean the Ruili Group?

Unidentified Audience Member

Yeah.

David Ming He

Okay.

Unidentified Audience Member

[Question Inaudible]

David Ming He

It is likely, acquisitions either from sister companies from under the Ruili Group or from other auto parts manufacturers in China, particularly in the Wenzhou area.

Unidentified Audience Member

[Question Inaudible]

David Ming He

Well, we will basically choose the other subsidiary or divisions of the company, which has great products, which has greater growth opportunities, so that we can inject into the public company to help the increase of earnings per share and the flow in the revenue and profitability.

Unidentified Audience Member

[Question Inaudible]

David Ming He

Our products meet the global ISO certifications, including the ISO 9001 and [CS 69.9], and currently we have only Tata Motors as our first OEM customer and it would take about two years to go through all the qualifications and the procedures to gain the approval from a new OEM.

Unidentified Audience Member

[Question Inaudible]

David Ming He

Yes. It has.

Unidentified Audience Member

[Question Inaudible]

David Ming He

Currently, we are running almost at capacity. That’s why a large portion of the proceeds from the public offering last year, about 50 million, will be used for the construction of the new plants. And actually, during the transition period, I mean before the completion of the new construction, we also will be able to lease additional space from the Ruili Group to accommodate the expansion.

Moderator

Are there anymore questions? Thanks, David.

David Ming He

Okay. Thank you. Bye-bye.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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To sponsor an investor conference presentation transcript please contact us.

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