China Automotive Systems: Strong Growth Drivers And Business-Friendly Ambience Provide Great Confidence

xieyuliang

Investment Thesis

China Automotive Systems, Inc. (NASDAQ:CAAS), done its subsidiaries, produces and distributes automobile systems and components successful China. It besides markets automotive components successful North America and Brazil and offers after-sales and R&D support services. Shares of nan company person been falling precipitously since nan opening of nan Covid-19 pandemic to astir August of 2022. Travel was restricted, and people's expertise to walk money was stifled owed to China's tight protective measures. All of these factors lend to CAAS's dismal banal performance.

Late successful 2022, however, nan company's banal value roseate sharply, starring to a year-over-year summation of astir 182%. This beardown summation resulted from China's reopening and favorable authorities measures. These aspects resulted successful coagulated income growth, pinch nan company's income increasing by astir 25% successful nan 3rd quarter alone. Looking forward, these tailwinds are still coming in nan economy, which bodes good for nan company's early prosperity. Thus, I person a affirmative outlook connected this stock. The falling costs of artillery components bolsters my bullish case.

Purchase Tax Relief: Supportive Government Policies Steers Sales Up

With nan government's argumentation to half nan acquisition taxation connected vehicles and different policies targeting stimulating user activity, automobile accumulation and income successful China successful 2022 accrued from nan erstwhile year. According to nan China Association of Automobile Manufacturers [CAAM], successful 2022, Chinese automakers accrued accumulation by 3.4% yearly to 27.02 cardinal vehicles, while income accrued by 2.1% to 26.86 cardinal units. This was nan wide trend, but CAAS outperformed nan marketplace pinch double-digit income growth.

Kevin Theiss," Total conveyance income successful nan 3rd 4th of 2022 accrued by 24.9% year-over-year pinch rider vehicles up 36.6% year-over-year and commercialized vehicles down 10.6% year-over-year."

Production and income successful China's car assemblage grew past twelvemonth contempt challenges specified arsenic nan return of Covid-19, a deficiency of semiconductor chips, costly artillery earthy materials, and an uncertain governmental climate, according to CAAM. Between June 1 and December 31, 2022, nan Chinese Ministry of Finance lowered nan acquisition taxation connected automobiles pinch 2-liter aliases smaller engines from 10% to 5% of nan sticker price. This applied to vehicles weighted astatine little than 300,000 Yuan ($45,000).

Downward Trend In Battery Materials: Lower Production Costs Increase Profit Margin

In nan preceding section, nan precocious costs of artillery earthy materials was 1 of nan headwinds successful nan automotive manufacture successful 2022. However, nan prices of nan artillery earthy materials are now connected a downward trajectory, which I judge will spell a agelong measurement successful controlling nan costs of production, resulting successful accrued profitability margins.

Lithium salts' nan superior constituent successful artillery production, saw their value proceed to autumn passim December owed to debased request and a pessimistic marketplace attitude. On January 12, 2023, Fastmarkets estimated that nan spot value scope exw home China for lithium carbonate 99.5% Li2CO3 min, artillery people was 470,000-500,000 Yuan per tonne, down 20,000 Yuan per tonne from nan erstwhile week's estimate of 490,000-520,000 Yuan per tonne. As of December 1, nan value ranged from 570,000 to 585,000 Yuan per tonne.

Fastmarkets

Lithium hydroxide monohydrate [LiOH.H2O] 56.5% LiOH min, artillery grade, spot value scope exw home China was 470,000-500,000 Yuan per tonne connected January 12. This was besides down by 20,000 Yuan per tonne from a week earlier, erstwhile it was 490,000-520,000 Yuan per tonne. On December 1, nan value was betwixt 570,000 and 580,000 Yuan per tonne.

Prices for cobalt sulfate, besides a cardinal earthy worldly for batteries, kept going down successful China past period because location wasn't overmuch request from nan downstream marketplace and capable supply. So far, successful 2023, this downward inclination has not changed.

Fastmarkets

Meanwhile, passim December, nickel sulfate prices successful China consistently declined, adding to nan database of artillery earthy materials whose prices trended downward.

Fastmarkets

As a consequence of nan market's persistent discounting of these components, I person optimism astir nan early of this company's profit margins and nan assemblage arsenic a whole. This development, I believe, will thief nan enterprises successful this assemblage dramatically rein successful their accumulation costs. Along pinch nan affirmative effects of taxation cuts and higher user spending that will beryllium discussed successful much item subsequently, this bodes good for nan future.

Consumers And Government Role In Cementing This Company's Growth

The Chinese system was severely impacted by nan country's determination to support Covid lockdowns for astir 2022, agelong aft nan remainder of nan world had lifted them. Unfortunately, it was only partially closed but is now afloat unfastened again. The authorities is anticipating a important economical recovery, owing to a jolt of assurance successful user spending. China whitethorn execute its maturation extremity of astir 5.5% this twelvemonth pinch this spending and a reasonable publication from nan government's investments without moreover having to export much than it imports.

Morgan Stanley Research Estimates

Due to nan harm done to family finances and assurance by past year's steep illness successful lodging values, Chinese consumers whitethorn beryllium much wary than their American counterparts were successful 2021. Yet, Chinese consumers did negociate to prevention heavy passim nan pandemic, which intends that a batch of latent request is waiting to beryllium released. In addition, since nan world system is weakening and proviso chains are operating smoothly, China's reopening is little apt to beryllium met by a jump successful inflation.

This is simply a affirmative motion for Chinese corporations' bottommost lines, which are expected to summation by double digits this year, a complaint importantly higher than successful astir immoderate different region. According to finance banks specified arsenic Goldman Sachs and Morgan Stanley, moreover if companies only meet nan market's profits expectations, investors whitethorn still spot favorable returns.

Lockdowns were not nan only logic Chinese stocks fell complete nan past 2 years. Geopolitical tensions and nan government's crackdown connected tech and spot besides played a role. Good news: nan management is returning to pro-growth measures connected galore fronts. It has supported alternatively than strangled nan spot sector, taken progressive stakes successful immoderate tech companies. Additionally, China is improving its negotiated ties internationally. For example, its relationship pinch India is getting better, which is bully for business because it opens up caller markets and demand.

When nan Chinese system has been afloat reopened, enhanced negotiated connections whitethorn create chances successful China that tie foreigners for business aliases tourism. If this occurs, much group will travel, raising request for automobiles, which will beryllium bully for CAAS.

Factiva

Against this backdrop, it's intolerable to contradict nan Chinese government's and consumers' value to nan improvement of Chinese business. Given this context, I judge accrued request for CAAS will chiefly beryllium driven by consumers' rising self-assurance and spending capacity. The government's work is to foster a prosperous business ambiance by fostering inclusive and cooperative negotiated ties and enacting policies that promote economical description . According to nan data, some consumers and nan authorities are doing their part, which bodes good for nan early of CAAS.

Following China's reopening, its organization will again prosecute successful travel, expanding request for automobiles, complementing these important tailwinds. To adhd to my erstwhile projection, this will beryllium an income generator for CAAS.

Valuation

Based connected nan comparative valuation metrics, CAAS seems to beryllium undervalued, arsenic almost each of them are beneath nan manufacture median. The existent value allows investors to bargain into a promising institution successful a promising system astatine a discount.

Seeking Alpha

I expect that nan company's stock value will proceed rising successful ray of nan galore positives successful its business environment. It sums up nan returns investors tin expect from a liking successful this breathtaking business.

Risks

This banal has overmuch going for it, but that doesn't make it a cleanable buy. Putting money into this statement is not without peril. The power problem poses nan top threat. Since Russia's penetration of Ukraine, nan power sector, which is important for nan car industry, has been successful disarray worldwide. Oil prices are highly high, and proviso concatenation problems person continued. That's a beautiful large obstruction to introduction if you're reasoning astir buying banal successful nan company.

Conclusion

Following a challenging 2022, CAAS appears to use from a prosperous marketplace pinch description opportunities. Since nan firm's revenues and profit margins are anticipated to summation successful nan pursuing quarters, I expect nan institution will proceed its precocious maturation trajectory. I urge buying nan banal since nan institution has a batch of imaginable and is now priced astatine a discount, but investors should beryllium alert of nan risks involved.

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