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SORL Auto Parts: Little Downside Risk

Quinn Foley profile picture
Quinn Foley


  • SORL is a legitimate company that provides high-value products to a diverse and growing customer base, at a reasonable profit.
  • But the stock trades at a 50% discount to book value, which basically implies that the business is worthless.
  • SORL is a China-based company, and we understand the skepticism given that Chinese companies have a history of corporate governance scandals.
  • But the downside to investors is limited at the current valuation.

SORL Auto Parts (NASDAQ:SORL) is China's leading manufacturer of air brake systems for commercial, passenger, and railway transportation vehicles. Its shares are trading about 20% lower since the company reported Q4 results last week, but aside from some cost inflation, the results were actually pretty good. With a P/B of 0.5, SORL is incredibly cheap for a company that sells high-value products at a reasonable profit (with a healthy balance sheet to boot), and while business risk has increased, it seems that SORL's status as a China-based company is what's ultimately responsible for the low valuation. We certainly understand the concerns here, but SORL appears to be a legitimate company and we think there's little downside risk at these levels.

Strength Continues

Revenues increased 43% in Q4 and 40% for the year as the company increased market share and expanded its global customer base. SORL reported strong growth across each of its three segments, but the core China OEM business was the highlight, growing 73% for the quarter and 52% for the year. China's auto-parts industry is in an upswing thanks to the government's infrastructure and property investments and tightening of emissions standards, which has raised demand for new trucks. Automobile output in China expanded to an all-time high of 29 million units last year, and commercial vehicles led the way with volume growth of 14%.

If SORL's increased investments in PP&E are any indication, the strength should continue. Last year the company invested $26M (14.2% of sales) in PP&E "to prepare for growing product demand", and management expects revenues to increase 15% to $450M in FY18. This is a huge investment compared to historical levels (SORL's capex averaged just 3.6% of sales over the previous ten years), and it follows up on 2016's relatively large outlay of 6%. These investments were a major drag on cash flow over the last two years, but with these

This article was written by

Quinn Foley profile picture
equity analyst / macro. passed cfa level ii exam

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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