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How To Play The Chinese Auto Boom

|Includes: BIDU, CTRP, NTES, TM, Volkswagen AG (VLKAF)

By Jason Raznick

The Chinese automobile market is growing at a blistering rate, and the growth of the auto modified plastic space is growing at an even faster clip. Between 2005 and 2009, automobile production volume has gone from 5.7 million to 13.8 million, which implies a CAGR of 25%, and the growth of this sector's sales volume has an estimated CAGR of 27%. One company which is obviously benefitting from these trends is China XD Plastics Co. (CXDC).

Last month, China XD Plastics Co. (CXDC) raised its forward looking guidance. The company now expects 2010 revenue to be in the range of $185 million and $215 million compared to previous guidance of $170 million to $200 million. China XD Plastics Company is a manufacturer and developer of modified plastics, primarily for automotive applications in China.

The company currently has a market cap of around $300 million, so there is plenty of room for growth, in China's fast-growing automobile market. Down the road, CXDC could be a multi-billion dollar corporation. On a forward P/E basis, the valuation looks compelling. The shares trade at just 8.23 times forward earnings estimates and at a seemingly very cheap PEG ratio of 0.52. Wall Street analysts are bullish on the stock as well, with a median price target of $10 and a high target of $11. The stock closed at 6.65 on Wednesday.

There are significant advantages to using modified plastics in the manufacturing of automobiles compared to metals. Plastics are much lighter, and they reduce weight by 30%-50%. They are also 40% less expensive than metals. In addition, plastics increase fuel efficiency, are easier to process, and are more environmentally friendly. China XD Plastics Co. (CXDC) is the largest manufacturer of automotive modified plastics in China, and sells to customers like China FAW, Volkswagen AG (OTCPK:VLKPY), General Motors and Toyota (TM), among others.

China XD Plastics Co. has grown the number of auto models that use its products from 11 models in 2006 to over 60 in 2009. Furthermore, no single customer accounts for more than 10% of the company's revenue. CXDC is taking several steps to ensure that its current impressive rate of growth continues well into the future.

The company has over 77 Research & Development professionals, over 80 sets of advanced R&D and QA equipment, and a new research center which will be fully operational in 2011. Furthermore, CXDC is collaborating with the top 8 universities and institutes in China in order to maintain its cutting edge technology and competitive advantage.

CXDC has a history of strong revenue and earnings growth. FY06-09 revenue CAGR was 116%. In the first quarter of 2010, revenues grew 90% year over year. Non-GAAP recurring net income for FY06-09 recorded a CAGR of 123%. Non-GAAP recurring net income for the first quarter of 2010 grew 118% year over year.

These metrics suggest that China XD Plastics Co. may follow a similar trajectory as other fast-growing Chinese companies such as Baidu (BIDU), Ctrip.com (CTRP) and NetEase.com (NTES). If this turns out to be the case, investors who get in at current levels will be richly rewarded.

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