SORL Auto Parts, Inc (SORL) is the one of the least exciting company I have ever covered. SORL is engaged in the manufacture and distributi...

Weekly Superstock Scan 22 May - 26 May 2017: SORL Auto Parts, Inc. (SORL)

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SORL Auto Parts, Inc (SORL) is the one of the least exciting company I have ever covered. SORL is engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd.





The Company has two operating segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems. In the latest quarter, commercial vehicle brake systems contributed 82% of SORL's revenue, with passenger vehicle brake system contributing the rest.

Breaking down into markets, SORL serves the China OEM market, China aftermarket and International market.


Technical



SORL has been trading in a box from $2.7 to $5 since September 2016. It was a consolidation box since the stock broke out of its long base in September 2016 at the $2 level.

Last week, upon release of 1Q2017 results, the price gapped up from $4.54 to open at $5.19, and closed the week at $7.13. The volume for the week was 21 million shares, more than 10 times its average weekly trading volume of 2 million shares.

The $5.10 level has served as resistance at multiple points since 2014. With the gap above the resistance, the strong surge may be due to a combination of breakout buying and short squeeze.


Fundamental


Including the current quarter, SORL reported 4 consecutive quarters of year on year EPS growth.

For the most recent quarter, the growth is contributed mostly by the Chinese OEM Market and Aftermarket, though the international market also grew by a respectable 12% year on year.

Chinese Government Regulations on Over-Loading

In order to improve the management of highways, life and property safety, the Chinese (PRC) government has begun stricter enforcement regulation GB1589 beginning on 21 September 2016. The regulation, originally issued in 2004, specifies the limits of the external dimensions, axle load and mass of different vehicles.

As a result, truck sales in China grew rapidly. According to China Association of Automobile Manufacturers for the first three months of 2017, sales of commercial vehicles were 154,000 units, up 22.9% year-on-year. First quarter truck sales in China were up 30.9% with the heavy-duty truck market, a key segment for SORL rising 93% year-over-year.

SORL continued to experience higher orders during the second quarter from strict enforcement of the new anti-overloading regulation campaign. In the long run, when the warranties of these new trucks expires, SORL can experience growth in the aftersales market.

Increase in Market Share

Since the Chinese government introduced rigorous regulations on overloading, SORL has been gaining market share with their new products and superior performance. Their priority in 2017 is to continue to expand market share. With a larger market share, SORL can enjoy economy of scale. For example, in the first quarter, SORL managed to keep the selling and distribution cost low as the same amount of sales team were able to post a stronger sales.

Recovery of the EV Sector

The general subsidy from the Chinese government which drove strong sales of EV buses over the past few years has been suspended due to fraudulent cases in terms of applying of government subsidy. However, the SORL management believes that the subsidy will start to open up again in  the second quarter.

Matrices
o Very low P/E - With a trailing twelve month EPS of $1.33, at the current price of $7.13, it is trading at a P/E of just 5.36. Considering its growth, SORL is undervalued.
- Low Float - SORL has a float of less than 8 million shares. Its average weekly trading volume  is 2 million shares. With a large proportion of shares changing hands, this stock can really move.


Risk Factors/ Things I do not like


  • Faraway Support: As mentioned earlier, the $5.2 level has served as previous resistance. This is also the only obvious support in sight. At the current price of $7.13, I am risking close to 30% if the stock fails to hold up.
  • Lack of Visibility Beyond Second Quarter: The growth in income is due to a one time catalyst and it is not sure for how long more the effect of the regulation can be felt. The management has given a conservative guidance for 2017, factoring a sluggish second half of the year.


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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.