Wonder Auto Technology: Driving Into China's Booming Auto Market

Mar.12.07 | About: Wonder Auto (WATG)

In mid February of 2007, Wonder Auto Technology (OTCPK:WATG), announced record revenues and profits for its’ fourth quarter and fiscal year of 2006. Despite these results Wonder Auto has received limited attention from the investment community. It currently trades at a PE of 18 even though they are expecting profit growth to be in the neighborhood of 50% for 2007. For investors looking to get in on China’s booming auto market Wonder Auto is definitely worth a look.

Amy Cheung of The China Perspective talks to Wonder Auto’s Chairman Qingjie Zhao about their current and future growth plans as well as the state of the Chinese auto market.

The China Perspective [TCP]:
What were the major factors driving Wonder Auto's growth in 2006? And what areas do you expect to be the primary growth drivers for 2007?

Qingjie Zhao [QZ]: The 2006 fiscal report we have recently released showed that sales revenues have seen significant growth in the past year. Wonder Auto’s two core products, starts and alternators, are the main areas of growth with 60% year-on-year jump.

There are two major factors constituting Wonder Auto’s growth: First, China’s auto industry and market have been growing rapidly to become the world’s second biggest auto market. In 2006, auto makers have produced around 7.2 million vehicles in the mainland, generating high demands for auto parts; Secondly, the company’s internal growth has surpassed the average auto parts industry growth rate. This is mainly a result of Wonder Auto’s accurate market positioning in accordance with changing market trends. Our starters and alternators with less than 1.5L capacity saw greater demands from small and midsize vehicles that have enjoyed increased popularity among middle class. In addition, compared with foreign auto makers from Germany, Japan and the US, our products are of high quality but comes with a relatively lower cost for auto makers.

As for 2007, Wonder Auto expects to generate more orders from our top 10 clients include Shenyang Mitsubishi and Beijing Hyundai. At the same time, we hope to realize more sales revenues from exports.

TCP: Chinese government prioritizes energy saving and limited pollution in their 11th Five Year Plan. How do Wonder Auto’s products fulfill these requirements?

QZ: Since Wonder Auto’s starters and alternators make no impact or difference on vehicle’s energy consumption or pollution level, the government’s energy-saving and anti-pollution objectives would not usher in adverse effects for us. As a matter of fact, Wonder Auto’s products have already specialized for vehicles of middle and low emission level. The new policy would offer great opportunities instead when the policy environment turn many auto makers and consumers to favor vehicles of less harmful emission.

TCP: Alternators and starters make up the vast majority of your total sales, with such good relationships in place with many major auto manufacturers in China are you planning on leveraging these relationships by possibly expanding your production line to include other types of auto parts?

QZ: At this stage, Wonder Auto has no plan to expand our product lines or other market segment. However, as the company grows bigger and retains the current growth rate, we may consider expanding our production line in the next few years.

TCP: Wonder Auto just won first run orders from Beijing Benz-Daimler Chrysler Automation and Nanjing MG Rover Motor. What do these contracts mean to your position in China?

QZ: We concluded the two contracts in the second half of 2006. As Beijing Benz-Daimler Chrysler targets at high-end market, we competed with several global competitors in addition to mainland auto parts makers for the contract; Nanjing MG Rover Motor places more focus on auto parts of larger size. The two contracts make Wonder Auto to compete with international auto parts makers and opened the window for the company to enter new market. This also proves that our products are able to meet higher product requirements which would help us to secure new clients especially more high-end clients from Europe and the US.

TCP: Apart from China, what are other markets that you operate in?

QZ: Wonder Auto considers strategic internationalization as an important part in our corporate strategy. While we have received contracts from Korea and Poland, we have successfully extended relations with an UK commercial vehicle maker. We are currently in talks with several international auto makers with the aim to explore cooperation possibilities and expand client base. We hope our exports would account for 30% of the total sales volume in three to five years.

TCP: What constitutes your market share in China’s auto parts market? Any concrete plans to expand this market share?

QZ: First of all, we secure our market position in China by positioning ourselves and adjusting our production and sales efforts according to market and consumer trends. Secondly, Wonder Auto is equipped with an internal research and development team led by six overseas experts whom possess respective understanding towards international market. Their technological and market knowledge of Japan, Korea and China are leveraged in our products. Thus our overseas competitiveness is enhanced; Moreover, we have paid great efforts in expanding and optimizing our supply chain. With good relations with suppliers, we are able to source materials locally to support efficient and cost-effective production.

To expand our market share, we plan to cultivate growth together with our clients whom act as windows to markets we have not yet stepped in. For example, establishing a long-term business relations with Beijing Benz-Daimler Chrysler not only enable us to grow by obtaining more domestic orders but also serve as a favorable platform to enter more top-end markets such as the US.

TCP: How would you characterize the Chinese, joint venture and foreign clients that you cooperate with in China? Do they demonstrate varied product needs because of their corporate backgrounds?

QZ: China’s auto market is divided into three camps of mainland local brands, Japan and Korea makers as well as those from Europe and the US. While local brands generated 1 million units in annual sales volume in 2006 and contributed 50% of Wonder Auto sales volume, Japan and Korea makers generated 1.5 million units in annual sales volume in 2006 and contributed 30% of Wonder Auto sales. Europe and US auto makers generate the highest sales volume but only 20% of Wonder Auto’s sales.

Their auto parts demands are resulted from differences in product prices, corporate positioning and cost. Foreign auto makers generally have much higher quality requirements than local auto makers. However, this is changing gradually with mainland makers striving to enter more high-end markets. Wonder Auto always supply products upon customer demands. We never say no to a customer request but we adjust our products and services accordingly. Beijing Hyundai, for example, is our major customer as we are their exclusive starter and alternator supplier in the mainland. We have a fulltime staff at Beijing Hyundai to coordinate product supplies and manage customer relations. This is the same case in Shenyang Mitsubishi.