China Automotive: Brilliance is an Understatement

Chinese stocks have been performing so well recently that I spent this past week looking for a really good Chinese stock to consider. We all saw soaring stock prices after earnings for Chinese Internet listings like Ctrip (CTRP), Baidu (BIDU) and The9 (NCTY), but that's not what I'm going to write about today. Instead, after doing a bit more research, I uncovered Brilliance China Automotive Holdings (CBA).

The company principally manufactures and sells buses, sedans and automotive components in China - and we all know exactly how fast the economy is growing. So like every other Chinese stock, think about the potential. In other words, CBA's customer demands will continue to grow from local automobile companies, but will also grow globally. In North America, its primary customers are the various North American operating divisions and subsidiaries of Ford (F), General Motors (GM), DaimlerChrysler (DCX), Honda (HMC), Nissan (NSANY.PK) and Toyota (TM). In Europe, customers include the European operating divisions and subsidiaries of DaimlerChrysler, the VW Group (VLKAY.PK), Ford, Rover, GM, BMW, Volvo Truck, Renault, MAN Truck, PSA/Peugeot, Citroen, Toyota and Honda.

Before I continue with more reasons for a strong buy opinion, let's go over some of their fundamentals

Revenue is 2006 came to RMB10,485 million (US$1,367 million) and analysts have estimated 40% growth for 2007 to RMB14,679 (US$1,913 million) and another 10% growth for 2008 to RMB16,147 (US$2,105 million). EBITDA is expected to grow at a faster rate from last year's RMB233,7 million (US$30.47 million), almost 305% growth to RMB946 million (US$123.3 million). You sure don't see those estimates for Ford or General Motors. Meanwhile, for their earnings, though they made a loss last year, analysts have remained optimistic and expected a profit this, and a growth of anywhere between 42% to 46% and another 40% for 2008.

More specifically, 2006 losses were narrowed because CBA was able to i) increase sales volume and ii) reduce impairment losses. Overall, total vehicle sales increased by almost 76% from 86,500 thousand units to 152,100 units. These vehicles included minibus sales, increasing 10.4% to 66,245 units, BMW sales increasing 35% to 23,600 units, and most impressively their sedans (their most popular) jumped 592% to 62,300 units. With their new version of their sedans launched in March, I would expect their sales volume to spike higher this year. For this first quarter alone, the weakest quarter of the year, 53,300 vehicles have already been sold - that's already 35% of 2006. If it doesn't grow quarter after quarter, that will still give 213,200 units, 40% more than 2006. Of course, analyst expect a lot more, because optimism is high, and average expected sales to come closer to 230,000 units.

One factor that kept earnings at a loss in 2006 was the drop in margin, which was about 9% in 2005, and dropped to 5.4% on average in 2006. Management is focusing on cracking down costs to push up this percentage in 2007, and an expected margin can come anywhere between 5.8% to 7.6% - an improvement that should help earning.

For the overall automotive industry in China, according to the China Association of Automobile Manufacturers, sedan sales grew 30.1% year over year, attributed to generic price cuts and new products that had been introduced into the market. With an industry outlook and its demand continually growing, why shouldn't CBA be able to leverage on it. While the industry has a P/E ratio of 14.41 and a sector P/E ratio of 19.52, CBA has a much lower and attractive leading P/E of 11.86. The same goes for P/B, while industry has 2.47 and sector 3.88, CBA has 1.16. All the points have lead me to the same conclusion, CBA is a good stock, undervalued and really worth considering. I have an estimated target price of $32.

CBA 1-yr chart

Disclosure: I do not own or have any positions or securities in Brilliance China Automotive Holding.

Comments

[Rohit Nagpal:]

What about the extreme run up in the general chinese markets? you have general valuations trading at 50x P/E. I would just be concerned about hopping on the band wagon so late in the cycle.

2007 May 22 10:11 AM

[omooc:]

Good article. I read, if my memory serves, an article in WSJ a week or so ago about CBA. There was some mention that CBA is teaming up with GM in China -- do you have any info on this. One point in your article is unclear to me. You mentioned a P/E ratio of 10x -- but CBA had a loss. So, how is this ratio established. Thanks. omooc (I may be reached at [e-mail])

2007 May 22 10:33 AM

[atrbovich:]

Great article! Even with chinese stock prices rocketing and a correction looming, China is still the place to be for the next ten years. You can check out an article on it at Investor's Daily Edge.

2007 May 22 02:53 PM

[Ishmiel Kapur:]

The P/E ratio was at 11.86, and is leading P/E meaning it's based on estimated earnings projected to the future, not from the past. You were correct, they did have a loss last year. But I'm more than confident that moving forward, they will be hitting into a profit from 2007 onwards.

Please feel free to visit my other blogs on BullPoo.com at ishmiel-blog.bullpoo.c.../

2007 May 23 12:59 AM

[Ishmiel Kapur:]

Oh yes, there was some news on the cooperation with GM, but I can't 100% confirm it. I did come across those details as well.

2007 May 23 01:00 AM