Skip to main content

What happened to China Automotive Systems?

China Automotive Systems (CAAS) reported 3rd quarter earnings on November 9 and the stock promptly sank.

I have written about the stock previously. The post was titled (with high expectations) "China Automotive -- looking for another good quarter." What went wrong?

Chart Breakdown --

CAAS had been caught in the general market downturn that began in the first few trading days of November. This derailed what was looking like a nice pattern forming that indicated the stock might be bouncing off support and getting ready to start running up again. The support didn't hold and the stock has been trading in a choppy manner before dropping further today. It now looks like the stock could take another leg down before bottoming.

The Numbers --

For the most part, it appears that 3rd quarter earnings were actually quite good. The day earnings were actually announced, the stock ran up nicely but fell back before the end of the day. Here is a rundown of the numbers:

-- Total net sales for the period increased to US$31.2 million, reflecting 39% year-over-year growth;

-- Net sales from steering components for passenger vehicles increased to US$20.2 million, reflecting 49% year-over-year growth;

-- Net sales from steering components for commercial vehicles increased to US$8.11 million, reflecting a 26% increase year-over-year;

-- Operating income increased to US$6.6 million, reflecting 95% year-over-year growth;

-- Net income rose to US$2.6 million, reflecting 68% year-over-year growth;

-- Diluted earnings per share were US$0.11, an increase of 57% year-over-year

Why didn't these numbers kick the stock into overdrive? First, note that all the results listed above are year-over-year numbers. Compared to the previous year, the results are indeed excellent. Looking at the numbers from a sequential point of view, however, not everything is so wonderful.

The first thing that jumps out is that sequential revenue is actually lower compared to the 2nd quarter. This has the downstream effect of causing a quarter-over-quarter decline in gross profit. Operating income was only 5% higher in the 3rd quarter than it was in the 2nd quarter.

A decrease in unit cost was partially offset by a decrease in selling prices which in the end resulted in the decrease in gross profit. Gross margin slipped a bit year-over-year which also contributed.

The company received an income tax refund of $801,059 for domestic equipment purchased during the 3rd quarter, which was reflected as a reduction of income tax expense in the company's consolidated statements of operations. Overall financial results would have been worse if this one-time tax benefit had not occurred.

Not everything is negative. The company did manage to keep a tight rein on costs.

Conclusion --

With the agreement with Volkswagen in place, I had expected to see an accelerated improvement in China Automotive's numbers. Though management pointed to the 3rd quarter as historically a slow season in the Chinese automotive market, I had the expectation that it would be able to overcome the slowdown due to increases in manufacturing and partner agreements. That just didn't happen.

Still, the company claims to be growing faster than the market, specifically the Chinese market. On an annual basis, results should be clearly better than the previous year. Unfortunately, it appears that the Chinese government is trying to cool off the entire economy by putting limits on bank lending. This will not bode well for the automotive sector as the vast majority of vehicles are purchased via auto loans. As a result, CAAS will, for now, only merit a place on our watchlist.

Disclosure: author no longer holds shares in CAAS

Comments

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional