Wonder Auto Technology: Revving profits
The rapidly growing demand for motor vehicles by Chinese consumers is putting a charge in Wonder Auto Technology, Inc. (Nasdaq: WATG), a parts maker whose shares have doubled this year.
Shares hit a 52-week high of $9.05 on Thursday Oct. 11, rising in a relatively short period from the 52-week low of $5.10, struck on Aug. 16.
Wonder Auto’s specialty is vehicle electrical systems, specifically alternators and starters. The company—with operations and manufacturing based in Jinzhou City and research-and-development facilities in Beijing—ranked second in sales in the China market for auto alternators and starters last year. The main focus of Wonder Auto is on supplying alternators and starters for autos, especially those with engines with a displacement of less than 1.6 liters. Wonder Auto also makes suspension parts through its subsidiaries.
Sentiment of the analysts who follow Wonder Auto is generally favorable about the company’s outlook, especially since Wonder’s stock moved from over-the-counter to the Nasdaq Global Market on Aug. 9.
The potential for vehicle sales in China is huge. According to the China Automotive Information Net, vehicle sales volume reached 7.22 million units in 2006, including 5.23 million passenger cars. More than two million of the vehicles sold were small cars, with engine displacement in the 1.0- to 1.6-liter range. Vehicle sales are expected to exceed 8.5 million this year—and Wonder Auto appears ready to tap into the demand.
Wonder Auto’s biggest customers have been Beijing Hyundai Motor Co., Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd., Harbin Dongan Automotive Engine Manufacturing Co. Ltd., and Tianjin FAW Xiali Automotive Co. Ltd.
Founded in 1996, Wonder Auto has seen its sales grow from $15 million in 2001 to $72.2 million last year. For 2006, Wonder Auto reported net income of $8.2 million, or $0.40 per share, up from $6.4 million, or $0.37, in 2005.
In the quarter ended June 30, Wonder Auto said revenue increased 25% to $23.6 million, and net income rose a healthy 84% to $3.8 million, which included an $800,000 government grant. Earnings per share increased to $0.16 from $0.12 in the 2006 quarter. Wonder Auto reported a strong gross margin of 24%.
Over the summer, Wonder Auto announced plans to issue up to 6.5 million shares of stock, but withdrew the offer in September because of unfavorable market conditions. Instead, Wonder Auto turned to the credit market, with two Chinese banks extending $24 million into which the company can tap to increase its production capacity.
Boosting production might soon become necessary. On Sept. 19, Wonder Auto said that one of its subsidiaries had inked a long-term supply agreement with a major European Tier-one auto parts producer. The contract with the unnamed supplier to 30 major automakers around the world runs through 2011 and Wonder Auto said that it’s expected to result in $10 million in sales annually.
The consensus estimate of analysts surveyed by Thomson Financial is looking for Wonder Auto to report $0.15 per share for the just-completed September quarter, rising from $0.10 in the same period last year. For all of 2007, earnings per share are expected to grow 42%, to $0.57 from $0.40 in 2006. The Thomson estimates call for quarterly revenue to increase 40% to $27 million, and full-year revenue to rise 45% to $105 million.
In reporting its second-quarter results on Aug. 8, Wonder Auto reaffirmed its 2007 guidance, which calls for revenue of $100 million and net income of $13.5 million.
In a Sept. 18 note to investors, analyst John Ma of Roth Capital Partners wrote, “Trading at only 0.3x its growth rate, WATG shares appear significantly undervalued when compared to its U.S.-listed peers.”
Ma noted that Wonder Auto is feeling the fallout created by reduced orders from Beijing Hyundai, once the company’s leading customer, which saw its sales drop 20% in the first eight months of 2007. As a result, Roth Capital’s estimates for Wonder Auto were trimmed slightly for the rest of the year—to $26.5 million in revenue and $0.15 EPS for the third quarter, and $102.2 million in revenue and $0.58 per share in earnings for 2007. Roth cut almost $3 million from its 2008 revenue outlook, reducing it to $139.6 million, but raised its earnings estimates to $0.82 from $0.80 per share because of improving margins.
Sterne Agee analyst Michael Coleman has a “buy” rating on Wonder Auto. He’s also looking for Wonder Auto to deliver $0.15 earnings per share on $28.1 million in sales when it announces its third-quarter results in mid-November. For 2007, Sterne Agee is expecting $0.56 earnings per share on $107.7 million in sales; Coleman’s estimates call for Wonder Auto to report 2008 EPS of $0.69 per share and revenue of $133 million.
The China market undoubtedly will become increasingly important to U.S. automakers, who will likely look to source parts in that region. For instance, a story in The Wall Street Journal on Monday said that Chrysler LLC officials are forecasting sales this year of 20,000 vehicles—more than double the 8,000 sold in 2006. The story also cited a survey by a unit of J.D. Power & Associates that found sales of subcompact cars in China during the January-August period increased 46% and accounted for more than a third of the Chinese market’s sales.
While the bread-and-butter market for Wonder Auto is mostly China and other Asian countries, it also is looking to the West, announcing on Oct. 1 that it has established a sales and marketing office in Detroit. The company also is scheduled to make a presentation at Gabelli & Co.’s 31st annual Automotive Aftermarket Symposium in Las Vegas on Oct. 29 to 31—a chance for Wonder Auto (WATG) to showcase its capabilities as it strives to make its name more recognizable in the global marketplace.
