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China Automotive Systems Offers Compelling Value

China Automotive Systems, Inc. (CAAS), an automotive parts manufacturer, is one of the cheapest stocks in a sector that is being largely ignored and enterprising investors could stand to profit!

The automotive industry may not be popular in the United States, but China’s automotive industry is still growing strong. Behind the boom are parts suppliers like China Automotive Systems, Inc. [[CAAS]], which manufactures power steering systems and other component parts for automobiles through its majority owned subsidiary Great Genesis Holdings Limited.

China’s automotive industry has rapidly expanded since the year 2000. In 2008, 9.34 million motor vehicles were manufactured in China, surpassing the United States as the second largest automobile maker after Japan. Meanwhile, China is now the largest car market in the world given its growing population and increasing wealth as the country matures.

During the first quarter, sales increased 7.7% to $44.69 million, but net income fell by nearly half to $2.25 million. However, a closer look at the loss shows that the majority of the fall could be attributed to losses on derivative securities and financial expenses. Given that these derivatives are now marked to fair value, there could be some upside in future quarters.

During the second quarter, China Automotive Systems expects to earn $52 million in sales with earnings per share between $0.18 and $0.22. The company attributed the improved results to strong cash flows from operations and renewed contracts with several key customers. As a result, it appears that the first quarter’s dip was a one-time event that shouldn’t sway opinion.

However, China Automotive Systems’ real value is largely derived from the large amount of cash on its books. As of March 31, 2009, the company reported cash of over $45.42 million, or $1.68 per share, which represents over 30% of its market capitalization. Subtracting out this cash, the stock trades at a price-earnings multiple of just 9.7x compared to its current 14.41x.

In the end, China Automotive Systems is a strong company operating in an industry that isn’t getting much attention. Investors looking for a profitable and undervalued Chinese stock may want to take a look at this under-followed company that appears to be turning itself around after a rough first quarter, and could be poised for success down the road.

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