CAAS - Bright Future For China Automotive Systems

Summary

• China Automotive Systems, Inc. successfully applies high-tech R&D to design, manufacture, and sell specialized vehicle components and systems to passenger and commercial vehicle OEMs.
• Shares will likely move between $7 and $10 over the next 12 months, making the stock a potential opportunity for risk-tolerant retail investors.
• There are headwinds and risks to consider, but the outlook for sales to China's automakers and those in emerging countries is bright.

Building The Business

We first wrote about China Automotive Systems, Inc. (CAAS) in December 2020. Two years later , we turned bullish when the share price was ~$4. Our position, at this time, is more positive and upbeat. We see a bright future for the company. Shares will likely move between $7 and $10 over the next 12 months, making the stock a potential opportunity for risk-tolerant retail value investors around $7 per share.

We forecast shares will move between $7 and $10 over the next 12 months. The price might fall if existential political conditions intensify and additional trade restrictions and sanctions against Chinese businesses persist . Meantime, two other reliable sources of advice underpin our enthusiasm.

Seeking Alpha's Quant Rating bounced from a Hold to a Strong Buy assessment in August '22. The Rating held consistent every day over the subsequent 6 months. Solid high Factor Grades are the same for the last 6 months, except for Growth. That slightly improved. In the same period, investors pumped the share price to nearly $10 before it retreated mid-February to ~$7.50.

The Company & Industry

The 24-year-old company operates through 16 subsidiaries. It primarily manufactures in China and sells to +60 OEMs worldwide rack and pinion, electronic, and hydraulic power steering gears, columns, and systems, sensor modules, motors, electromechanical integrated systems, polymer materials and other intelligent automotive technology for passenger cars and commercial vehicles.

The company works with some of the five largest automobile manufacturers in China: Chery Automobile Co, BYD Auto Co Ltd (BYDDY), and Zhejiang Geely ( OTCPK:GELYY ). It has joint ventures with and sells to General Motors (GM), Volkswagen ( OTCPK:VWAGY ), Citroën, and Chrysler North America. Fiat Chrysler North America and Ford Motor ( F ) are customers since 2009 and 2016, respectively.

Risks

China Automotive shares are up +187% over the last 12 months. They sold at a low of $2.20 at one point. Then the Chinese government offered tax cuts and subsidies on new vehicles. When they were set to expire in December '22, consumers rushed to market. The share price skyrocketed from $3.70 to $9.70. New energy vehicle sales were naturally sluggish in the first 6 weeks of 2023. Investors responded by selling and the share price slipped to $7.50.

Share prices are down for many of the overseas-based carmakers with which China Automotive deals. For example, Ford shares are -26% for the year, VW -29%, and GM -12.6%.

Its Q4 '22 earnings announcement is scheduled for March 29, 2023. Financial news outlets are not expecting anything positive. EPS is probably going to be $0.07 compared to last year's $0.16. Revenue will be $138.5M slightly less than the year before.

Think Long-Term

The Global Times concludes the long-term outlook for China's auto sales looks bright for 2023, citing two sources. According to the China Assn of Automobile Manufacturers, there will be a 3% increase in China's 2023 total auto sales. A VW China Group executive told the media their passenger car sales will be up 4% to 5% in 2023.

Automotive World joined the choir this month, predicting that

Light Vehicle sales are expected to show a 3.5% year-on-year growth... The US light vehicle market is projected to grow by around 10% to 12% in 2023." (In China) "anticipated sales will total more than 26 million vehicles with the EV segment seeing a 20% growth, with around 6.2 million in sales-a market share of 23%, up from 19% in 2022.

This tiny company attracts a few hedge funds, but it is the trend that we find interesting. In 2014, 5 funds owned the stock when the shares hit a high of $9.26. The number of funds sold out as the price fell to $2.03. 5 funds were back shortly before shares rose to +$6 in Q1 '21. Soon there were 3 funds holding shares concurrent to the current uptick in the share price. Following this trend, we expect more funds will be buying shares. The Beta is 0.92.

All this bodes well for China Automotive, in our opinion. As of last September,

• Current short interest is just 1.6%.
• The price-to-earnings (fwd) ratio is 12.16.
• Revenue was $581M for the year. Earnings were $21.8M.
• Debt is a low $44.7M with cash on hand over $100.7M.
• The market cap is $227.68M.
• Actual earnings have exceeded forecasts every quarter since November '21.

The company's financial strength lies in its potential revenue growth and its admirable cash flow from operations. These assets enhance China Automotive's ability to borrow money if necessary to expand operations and finance new orders.

Drive away

We do not pay short shrift to the challenges facing the automotive industry in the coming year. Headwinds are formative. Higher interest rates, inflation causing sticker shock, supply chain disruptions, a possible deep recession, and unstable energy costs have analysts worried . But China Automotive appears to produce valued products. The Chinese auto industry, the biggest auto market in the world, suffers from the suspension of subsidies and the global market is worrisome.

China's communist government does not link energy prices to the international price of oil. Gasoline prices are stable compared to other large markets, and the push for EVs in China is the cornerstone of its automobile industry policies. China Briefing updated its report that the government of China is considering extending subsidies deep into 2023 "to stimulate the ((EV)) market, besides tackling slow growth in the auto industry" after experiencing the 38% plunge in January's car sales.

China Automotive is already making inroads into emerging manufacturing markets like Brazil. The company is focused on a specific set of products critical to every vehicle. It is not trying to be all things to all manufacturers nor compete with them. The company is technology-driven, not looking to change consumer preferences but enhance the efficiencies of vehicle manufacturers and expand their sales. It is our opinion that China Automotive drive its share price higher and is a potential opportunity for retail value investors, they ought not to drive by.

For further details see: