China Automotive Systems: A Good Play On China's Consumption Growth

| About: China Automotive (CAAS)

As I showed in my previous article, Chinese companies audited by PWC Zhong Tian have trustworthy financial reports. All the companies listed in the article have financials as as reliable as if they were American companies. Many of them have very cheap valuations, considering China is still one of the fastest growing countries in the world.

In this article, I had recommended Home Inns & Hotels Management (HMIN) as a good growth investment. Another fast growing company with low valuations is China Automotive Systems, Inc (CAAS). This is a company that is constantly expanding, and has a foothold in the competitive China automobile industry.

China Automotive Systems, Inc manufactures and sells power steering systems and related products to automobile manufacturers in China and the US. While auto sales growth was good in the US in 2011 (up 10.2%), it was very tepid for China (only up 2.5%). CAAS paid for it, hitting a 52-week low of $3.32 in December 2011. The stock rose with the rest of the market this year, closing at $6.55 yesterday, which is still low compared to the way it has been trading in the past couple of years.

Revenues for CAAS grew slightly in 2011 to $348 million, compared with $345.9 million in 2010. Net income for 2011 was $36.2 million, compared to $44.7 million in 2010. At the current price of $6.55 and diluted earnings per share of $0.69, this gives it a still modest 2011 PE ratio of 9.5. With its solid partnerships and future growth, a PE of 15-20 would be more appropriate in my opinion.

The biggest reasons for the 21% drop in net income is from all around higher expenses, including R&D which went from $8 million in 2010 to $10 million in 2011. CAAS is currently spending more because it's expanding in China and other countries and must produce fresh, state-of-the-art technology.

It's also producing new steering models specifically for vehicles produced by state-run Beijing Auto. That joint venture was announced in Jan, 2010, but is bearing fruit now. In early 2012, the company started joint ventures to make power steering units with Shaghai Auto and also SAIC-IVECO, a truck manufacturer.

On the export front, in November it signed a multi-year deal with Chrysler to have its power steering products installed into RAM pick-up trucks - 5.9% of the company's revenue was due to Chrysler group in 2011, and that should increase in 2012. Net sales in the US as a percentage of revenue grew to 6.4% in 2011 from 5.0% in 2010 and 2.4% in 2009. The company is also ramping up its joint venture in San Paulo, Brazil, another country with growing automobile sales.

China's passenger-car sales rose 4.5% in March, beating analyst estimates of 3.9%, as dealerships increased discounts to attract buyers. News today shows that although China GDP growth slowed more than expected in the first quarter, consumption is still high and beat analyst expectations. This bodes well for China Automotive Systems.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.