China Automotive Systems (NASDAQ:CAAS)

WUHAN, China, May 23, 2012 /PRNewswire-Asia-FirstCall/ -- China Automotive Systems, Inc. ("CAAS" or the "Company") (NASDAQ: CAAS), a leading power steering components and systems supplier in China, today announced that its wholly owned subsidiary, Great Genesis Holdings Limited ("Great Genesis"), has entered into a definitive agreement ("Agreement") to sell its equity interest in Zhejiang Henglong & Vie Pump-Manu Co., Ltd. ("Zhejiang"), to the Zhejiang Vie Group ("Vie Group"), Great Genesis's joint venture partner in Zhejiang. This transaction is subject to local regulatory authority approval.

Founded in 2002, Zhejiang, which designs, manufactures and markets power steering pumps, is located in Zhuji City, Zhejiang Province. According to the Agreement, Great Genesis will sell its 51% stake in Zhejiang to Vie Group for RMB52 million, which represents a 24% premium as compared to the May 20, 2012 estimated net book value of approximately RMB42 million. According to unaudited accounting information, Zhejiang's net sales for the first quarter of 2012 declined by approximately 25%, as compared to the same fiscal quarter of 2011, mainly due to lower sales volume. Zhejiang generated approximately $34,000 in net income during three-month period ended March 31, 2012.

Mr. Hanlin Chen, chairman of CAAS's board of directors, commented, "With the sale of the Zhejiang pump business we are a more focused company, with our core business in power steering gears and new technologies such as our electric power steering systems. We wish Zhejiang well, as we better align CAAS's businesses for the future."

First Quarter Highlights

• Net sales were $84.5 million, compared to $91.0 million in the first quarter of 2011
• Gross profit was $16.0 million, compared to $20.0 million in the first quarter of 2011; gross margin was 19.0% in the first quarter of 2012, compared to 22.0% in the same quarter of last year
• Income from operations was $6.4 million, compared with $11.7 million in the first quarter of 2011, and the operating margin was 7.6%, compared with 12.9% in the first quarter of 2011
• Net loss attributable to the parent company's common shareholders was $0.8 million, or a diluted loss per share of $0.03, versus net income of $17.2 million, or diluted earnings per share of $0.23, in the first quarter of 2011
• Non-GAAP net income attributable to the parent company's common shareholders was $3.8 million or $0.12diluted earnings per share, versus non-GAAP net income of $6.9 million, or $0.22 diluted earnings per share in the first quarter of 2011
• Research and development ("R&D") expenses were $3.7 million, compared to $2.3 million in the first quarter of 2011
• Net cash flow from operations was $8.5 million, compared with net cash used in operations of $3.5 millionin the first quarter of 2011
• Cash and cash equivalents were $79.9 million at March 31, 2012, up from $73.0 million at December 31, 2011.

Mr. Qizhou Wu, chief executive officer of CAAS, commented: "During the first quarter, the PRC domestic passenger vehicle brands sold approximately 712,000 units, a year over year decline of 15%. On the commercial vehicle front, PRC truck sales continued to experience double-digit percentage declines due to fewer infrastructure projects and the slowed real estate market. As the largest supplier to many large domestic OEMs, we took hits from both sectors. While we are waiting for conditions to improve in the PRC, we are rapidly expanding our sales in North Americaand planning for expansions in emerging markets. Our shipments to North America, mainly to Chrysler, rose 86% from same period of 2011. We also recently announced our joint venture inBrazil, another large market currently dominated by European steering producers. Our financial standing remains solid, as we generated strong cash-flow in the first quarter."

Business Outlook

Management's revenue guidance is for 5% year over year growth for the full year 2012. This target is based on the Company's current views on operating and market conditions, which are subject to change.

Fourth Quarter 2011 Results

• Net sales were $99.5 million, compared with $100.5 million in the fourth quarter of 2010
• Gross profit was $19.5 million, compared with $19.8 million in the fourth quarter of 2010
• Operating income was $8.0 million, compared with $12.3 million in the fourth quarter of 2010, and operating margin was 8.1%, compared with 12.2% in the fourth quarter of 2010
• Net income attributable to parent company's common shareholders was $6.0 million, compared with $10.6 million in the fourth quarter of 2010, with diluted earnings per share of $0.19, compared with diluted earnings per share of $0.22 in the fourth quarter of 2010.

Mr. Qizhou Wu, chief executive officer of the Company, commented: "2011 was a challenging year for the Chinese auto industry. However, we held our ground by increasing domestic penetration in Dongfeng PSA and growing our export business with Chrysler North America. Our new products, especially electric power steering ("EPS"), grew in unit volume and commanded higher prices. On the strategic partnership front, we added two key joint ventures with Shanghai Auto-IVECO Hongyan in early 2012 and Beijing Auto, which will significantly lift our presence in these large organizations and pave the way for broader cooperation in the future. In addition, we will form a joint venture outside of China and establish a foothold in another large and rapidly growing market, Brazil."

Business Outlook

Management's revenue guidance is for 10% year-over-year growth for the 2012 year. This target is based on the Company's current views on operating and market conditions, which are subject to change.

"We are cautiously optimistic about 2012 despite the uncertainty in the Chinese domestic market. The PRC government's recent policy on government vehicle purchases can be a positive catalyst to home-grown brands, as the annual vehicle spending by government entities is a sizeable percentage of the PRC market. And, many of these qualified models are already using CAAS steering systems. However, we will continue to diversify the customer base and leverage our brand recognition to increase penetration into existing customers. Our success with Chrysler Dodge RAM will open many doors for us globally. We will continue to focus on exercising financial discipline and generating free cash flow. We remain confident that CAAS will continue to grow long-term shareholder value," Mr. Wu concluded.

On February 15, 2008, the Company issued $35,000,000 of Convertible Notes to Lehman Brothers Commercial Corporation Asia Limited, “LBCCA”, and YA Global Investments, L.P., “YA Global”, maturing in 5 years. According to the terms of the Senior Convertible Notes (as described in Note 13), Convertible Notes may be required to be repaid in cash on or prior to their maturity. For example, Convertible Note holders are entitled to require the Company to redeem all or any portion of the Convertible Notes in cash, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than $3.187 at any time following February 15, 2009, the “WAP Default,” by delivering written redemption notice to the Company within five (5) business days after the receipt of the Company’s notice of the WAP Default.

As a result of the worldwide financial turmoil in 2008 and the first half of 2009, the Company’s stock’s WAP for twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187. On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note holders. On March 27, 2009, the Company received a letter dated March 26, 2009 from YA Global, one of the Convertible Note holders, electing to require the Company to redeem all the three Convertible Notes it held in the total principal amount of $5,000,000, together with interest, late charges, if any, and the Other Make Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, on April 15, 2009, the Company paid YA Global $5,041,667 for the total principal amount ($5,000,000), together with interest and late charges, if any. YA Global has waived its entitlement to the Other Make Whole Amount.

The Company’s ability to redeem the Convertible Notes and meet its payment obligations depends on its cash position and its ability to refinance or generate significant cash flow, which is subject to general economic, financial and competition factors and other factors beyond the Company’s control. The Company cannot assure you that it has sufficient funds available or will be able to obtain sufficient funds to meet its payment obligations under the Convertible Notes, and the Company’s redemption of the Convertible Notes would result in an adverse effect on its liquidity and capital resources, business, results of operations or financial condition.

Third Quarter 2011 Results

Fourth Quarter Results: 

• Record net sales grew 20% to $100.5 million in the fourth quarter of 2010 as compared to $83.8 millionin the same quarter of 2009.
• Gross profit was $19.8 million compared to $19 million in the fourth quarter of 2009, which reflects an increase in net sales and sales volumes that were partially offset by declines in sales price in excess of unit cost reductions.
• Operating income grew 44.7% to $12.3 million for the fourth quarter of 2010 from $8.5 million in the 2009 fourth quarter. Operating margin climbed to 12.2% in the fourth quarter of 2010 from 10.1% in the fourth quarter of 2009.
• Net income was $12.3 million in the fourth quarter of 2010, or diluted earnings per share of $0.22versus a loss of $24.2 million, or $0.89 loss per share in the same quarter of 2009.

Management provides revenue guidance of 15% year-over-year growth for the 2011 year. This target is based on the Company's current views on operating and market conditions, which are subject to change.

Rodman and Renshaw on CAAS                  6/10/2011

CAAS: Terminating Coverage

Terminating Coverage: Effective immediately, we are terminating coverage on China Automotive Systems Inc. (Nasdaq: CAAS) to better allocate resources within our coverage universe. Our last rating for CAAS was Under Review / Speculative Risk. Investors should not rely on our previously published financial projections.

Financial Statements To Be Restated

CAAS announced that it expects to restate its previously released financial statements for FY09 and the first three quarterly filings of FY10 due to non-cash gains and losses in relation to its accounting for convertible notes issued in Feb 2008. According to ASC 815, CAAS is required to record the conversion feature of the notes as derivative liabilities valued at fair value, therefore the change in fair value of this conversion feature should be reflected in CAAS’ income statement. The company estimates an adjustment of a loss of $43 MM for FY09 and a gain of $19 MM for FY10. However final determination has not yet been made, and this adjustment is subject to changes.

NASDAQ Letter

CAAS also received a notification letter from the NASDAQ on March 17, 2011 indicating that the Company was not in compliance with the continued listing requirements under NASDAQ Listing Rule 5250(c)(1), which requires the timely filing of SEC periodic reports. CAAS had 60 calendar days, or until May 16, 2011, to submit a plan to NASDAQ to regain compliance with the NASDAQ Listing Rules. On May 13, 2011, CAAS provided a plan to the exchange, and on May 17, 2011, the company received an additional letter from NASDAQ indicating its non-compliance status and requiring the company to provide an update to the plan by May 31, 2011. The company believes it will be able to file the required reports / forms by the end of June 2011.

Company Description

Headquartered in Hubei Province, China Automotive Systems, Inc. (CAAS) is a leading supplier of power steering components and systems to the Chinese automotive industry. With more than a decade of manufacturing experience, the company’s product offerings include power and manual steering systems for both passenger and commercial vehicles. The company’s sales and distribution network covers all of China, including all major automotive vehicle producing regions.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

HUBEI PROVINCE, China, May 19, 2011 /PRNewswire-Asia/ -- China Automotive Systems, Inc. (Nasdaq: CAAS) ("CAAS" or the "Company"), a leading power steering components and systems supplier in China, today announced that on May 16, 2011, as expected, it received an additional notification letter (the "May 16th Notification Letter") from the Nasdaq Stock Market ("Nasdaq") indicating that the Company was not in compliance with the continued listing requirements under Nasdaq Listing Rule 5250(c)(1), which requires the timely filing of SEC periodic reports, due to the delayed filing of CAAS's quarterly report on Form 10-Q for the three-month period ended March 31, 2011 (the "2011 Form 10-Q"). This letter follows the notification letter received by CAAS on March 17, 2011 (the "Initial Notification Letter") in response to the delayed filing of CAAS's annual report on Form 10-K for the year ended December 31, 2010 (the "2010 Form 10-K"). As with the first letter, the May 16th Notification Letter has no immediate effect on the listing or trading of CAAS's shares on Nasdaq.

As disclosed in a Form 8-K filed by the Company with the Securities and Exchange Commission on March 17, 2011, CAAS expects to restate its previously issued financial statements for fiscal year 2009 and the first three quarters of fiscal year 2010 to reflect non-cash gains or losses related to the accounting treatment for the Company's convertible notes issued on February 15, 2008 based on the guidance outlined in Accounting Standard Codification (ASC) 815.  Due to this restatement, the Company has not yet been able to file the 2010 Form 10-K and the 2011 Form 10-Q, which has prompted Nasdaq to issue the Initial Notification Letter and the May 16th Notification Letter. The Initial Notification Letter required CAAS to submit to Nasdaq a plan for regaining compliance with the Nasdaq Listing Rules.  In response, CAAS provided its plan for regaining compliance on May 13, 2011.  The May 16th Notification Letter requires CAAS to file an update to this plan by May 31, 2011.

CAAS believes that it will be able to file its amended annual report on Form 10-K for the year ended December 31, 2009 (which will include restated comparative financial statements for 2008) and amended quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2010 (which will include restated comparative financial statements for the respective periods of 2009) as well as the 2010 Form 10-K and the 2011 Form 10-Q before the end of June 2011.  The Company expects that the filing of these forms will allow it to regain compliance with the Nasdaq Listing Rules.

Preliminary Fourth Quarter Results:

• Record net sales grew 20% to $100.5 million in the fourth quarter of 2010 from $83.8 million in the same quarter of 2009.
• Gross profit was $19.8 million compared to $18.2 million in the 2009 quarter, reflecting the increase in net sales offset by higher warranty expenses and raw material costs in the 2010 fourth quarter. Gross margin in the fourth quarter of 2010 was 19.7% versus 21.8% in the 2009 fourth quarter.
• Income from operations grew 113% to $12.3 million for the fourth quarter of 2010 from $5.8 million in the 2009 fourth quarter. The increase in income from operations resulted from a combination of higher gross profit, reduced general and administrative expenses, and lower depreciation and selling expenses. Operating margin climbed to 12.2% in the fourth quarter of 2010 from 6.9% in the fourth quarter of 2009.

"We have made solid progress in addressing the previously announced errors in the accounting treatment for the Company's convertible notes as reported in a press release on March 17, 2011. We continue to expect to complete the restatements of our audited 2009 financial statements and our unaudited interim financial statements for the first three quarters of 2010 during the second quarter of 2011. The audit for 2010 and the restatements for 2009 and 2010 are still in progress. Upon completion of the restatement, we will file our 2010 Form 10-K, as well as our amended 2009 Form 10-K and amended Forms 10-Q for the first three quarters of 2010. The accounting issues are non-cash in nature and do not affect the Company's operations," Mr. Chen concluded

Rodman and Renshaw on CAAS                                       3/23/2011

CAAS: Taking Our Rating Under Review

Financial Statements To Be Restated: CAAS announced that it expects to restate its previously released financial statements for FY09 and the first three quarterly filings of FY10 due to some non-cash gains and losses in relation to its accounting for convertible notes issued in Feb 2008. According to ASC 815, CAAS is required to record the conversion feature of the notes as derivative liabilities valued at fair value, therefore the change in fair value of this conversion feature should be reflected in CAAS’ income statement. The company estimates an adjustment of a loss of $43 MM for FY09 and a gain of $19 MM for FY10. However final conclusion has not yet been made, and this adjustment is subject to changes.

Rating Under Review: Following this development we are changing our rating on CAAS from market Outperform to Under Review. In line with this we are removing our financial projections for the company. The company identified this accounting error when the recently appointed PwC was undertaking its annual audit for FY10. CAAS expects that the review will be completed during the second quarter of 2011. We will revisit our financial projections and rating once management finishes the audit and restatement process and files its 10-K/10-Q forms with SEC.

NASDAQ Letter CAAS also received a notification letter from the NASDAQ on March 17, 2011 indicating that the Company was not in compliance with the continued listing requirements under NASDAQ Listing Rule 5250(c)(1), which requires the timely filing of SEC periodic reports. The notification letter from NASDAQ has no immediate effect on the listing or trading of CAAS' shares on the NASDAQ Stock Market. CAAS has 60 calendar days, or until May 16, 2011, to submit a plan to NASDAQ to regain compliance with the NASDAQ Listing Rules. If NASDAQ accepts the Company's plan of compliance, NASDAQ may grant an extension of up to 180 calendar days from the due date of the annual report on Form 10K, or until September 16, 2011, to regain compliance.

Company Description Headquartered in Hubei Province, China Automotive Systems, Inc. (CAAS) is a leading supplier of power steering components and systems to the Chinese automotive industry. With more than a decade of manufacturing experience, the company’s product offerings include power and manual steering systems for both passenger and commercial vehicles. The company’s sales and distribution network covers all of China, including all major automotive vehicle producing regions.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

As previously disclosed in the Form 8-K filed on February 21, 2008, China Automotive Systems, Inc. issued convertible notes to two institutional investors with an aggregate principal amount of $35,000,000 in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act. On April 15, 2009, the Company redeemed from one of the investors convertible notes for an aggregate principal amount of $5,000,000.

On March 1, 2011, an investor converted $6,428,571 principal amount of the convertible notes at a conversion price of $7.0822 per share, and the Company issued 907,708 shares of its common stock to the investor. No additional consideration was paid for the conversion of the convertible notes into common stock.

Rodman and Renshaw on CAAS                      1/31/2011

CAAS: 4Q10 Preview; Lowering Price Target to $17.00 

Faster Growth in Passenger V Should Boost 4Q10 for CAAS: During 4Q10, total sales volume of passenger vehicles grew by 42.3% from 4Q09, reaching 3.9 MM units, outpacing the 17.9% y-o-y growth and 1.1 MM units in volume for commercial vehicles. We believe this trend could help CAAS to potentially deliver a top-line number that may be better than we previously projected, given that more than 60% of CAAS’ FY09 revenue came from steering products for passenger vehicles.

2011 Volume Growth Should be Driven By Capacity Ramp: CAAS has gradually added capacity in its existing facility and will continue to expand in 2011, with the plan to reach 4 MM units/yr, a 25%~30% increase from current level.

Expect Exports & Electric Power Steering to Pick Up: Management expects EPS product shipment volume to triple in 2011 from 40,000 units shipped in 2010. Exports to Chrysler (Private, Not Rated) should also grow substantially. The two segments together should fuel the top-line growth for 2011 and potentially help CAAS to outperform the overall auto market.

But Margin Pressure Remains: Given the competitive nature of this business, and the volatility in steel and aluminum prices, CAAS should still face some level of margin pressure in 2011. In our view, this environment should largely benefit bigger parts suppliers who have the capacity and flexibility to ramp up production quickly to meet the demand. We believe mid-sized suppliers like CAAS should also have an opportunity to gain market share through moderate price cuts. On raw material side, a lower production level of steel may push steel price up for the year, therefore further squeezing some margins. We expect a slightly lower gross margin of 23% in 2011, primarily driven by a margin decline in traditional power steering products but somewhat offset by a growing portion of higher margin products like EPS and exports.

4Q10 Preview: For 4Q10, we now expect revenue, net income, and diluted EPS of $95.5 MM, $8.0 MM, and $0.26, respectively. Going into 2011, our estimates are $412.7 MM, $36.2 MM, and $1.17.

Lowering Price Target: We are lowering our price target on CAAS from $23.00 to $17.00. We had been assigning the company a higher multiple earlier to reflect margin stability in the business. However, it appears that volatility in raw material costs and higher revenue contribution from lower margin offerings may keep margins under pressure. We also believe our new price target on CAAS is a better reflection of industry averages. Currently CAAS is trading at ~11.5x and ~11.2x to our FY10 and FY11 EPS estimates. At our price target of $17.00 the company will trade at ~14.9x and ~14.2x to our FY10 and FY11 earnings estimate, compared to ~20.0x and ~16.2x for China listed peer companies and ~23.6x and ~16.3x for US listed companies. Though we expect the company to continue commanding valuation multiples at the high end of the range given its market position and product mix, we believe any further multiple expansion will only come on margin improvements. We maintain our Market Outperform rating.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Global Hunter on CAAS

China Automotive Systems Inc. (Accumulate)
CAAS: Q3 in line. Share decline provides better entry point; Upgrading to Accumulate.

Upgrading from Neutral to Accumulate following the recent price drop. We continue to like the fundamentals of the company given its leading market position, strong customer base and R&D capabilities. We believe it will maintain an industry leading position, continue to penetrate domestic market, and expand into international market. Its healthy balance sheet should be sufficient to support its organic growth in the next 1-2 years. As shares have dropped 20% since August and 40% from its 52-week high in January, they are now trading at 12.7x our FY11 EPS, which we view as a more attractive entry point. As such, we are upgrading our rating from Neutral to Accumulate, and reset our price to $18.50, or 15x our FY11 estimate

Third Quarter 2010 Results

• Net sales increased 17.7% year-over-year to $76.1 million, a record sales performance for any third quarter in the Company's history. Net sales for the third quarter of 2009 were $64.7 million. This revenue increase was driven by purely organic growth. Third quarter, or the summer season, is typically a relatively slow sales period compared with other quarters.

• Gross profit increased 17.4% to $18.2 million, compared with $15.5 millionfor the same quarter in 2009. Since the first quarter of 2010, the Company began reclassifying product warranty expenses under cost of goods sold, instead of its previous classification under selling expenses.

• The third quarter 2010 reclassified gross margin was 23.9%, in line with the reclassified gross margin for the same period of 2009. Before the warranty adjustment, the gross margin would have been 25.4% in the third quarter of 2010.

• Operating income increased by 26.1% to $12.2 million in the third quarter of 2010, compared with $9.7 millionin the third quarter of 2009. Operating margin was 16.0%, compared with 14.9% for the same quarter in 2009.

• Primarily as a result of the decrease in non-cash gain due to the change in the fair value of the derivative, net income attributable to common shareholders was $8.2 million for the third quarter of 2010, or $0.26 per diluted share, compared with $8.6 million, or $0.28 per diluted share in the same quarter in 2009.

Mr. Qizhou Wu, Chief Executive Officer of China Automotive Systems commented, "We are very pleased with the strong sales results posted for the 2010 third quarter, as the summer season is our slowest sales period compared to other quarters. We continue to operate at a high capacity utilization rate and have invested over $24 million in the first nine months of 2010 to make sure we can meet future demand, especially for our new, more advanced products."

Business Outlook

Management raises revenue guidance to 30% growth for the 2010 fiscal year. This target is based on the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update this guidance.

Rodman & Renshaw on CAAS

Overview: CAAS announced its 3Q10 revenue, net income and EPS of $76.1 MM, $8.2 MM and $0.26, beating our expectations of $74.2 MM, $6.3 MM, and $0.21, respectively. This compares to street consensus estimates of $76.2 MM, $6.7 MM, and $0.22, respectively (from FactSet). The Y-o-Y top-line growth of 17.7% was primarily due to continued demand for both passenger vehicles and commercial vehicles in China. Net income was $8.2 MM, representing 10.8% net margin. 

China’s Auto Sector Remains Robust: China’s auto market has been growing rapidly so far this year. According to CAAM’ statistics, during the first 9 months of 2010, total production and sales volume for Passenger Vehicles reached 9.88 MM and 9.90 MM units, growing by 38.07% and 36.68% Y-o-Y. This compares to production and sales of 3.20 MM and 3.24 MM units for Commercial Vehicles, which grew by 30.35% and 33.85% from the same period in 2009. We believe the overall auto market should continue growing at a healthy to moderate pace in the near-term future. 

Margin Pressure To Be Addressed: Going forward into 4Q10 and FY11, management indicated that with rising competition and an upward trend in raw material cost, CAAS may have limited chances to pass on higher material cost to customers. However, management expects to relieve some of the margin pressure in FY11 by taking a series of initiatives including (1) expanding production in Electric Power Steering products, which have a higher ASP and margin, (2) pressuring upstream suppliers for better terms, (3) aggressively penetrating into overseas market, and (4) launching more higher margin products. 

Growth For FY11: Per the earnings call, we believe the top-line growth should be driven by (1) capacity for Electric Power Steering; shipment for EPS products has been growing dramatically from January’s ~1,000 units/month to September’s ~8,000 units/month. Management expects EPS’ revenue contribution to grow even faster in FY11. (2) Export market should play a larger role in the top-line growth for FY11 compared to FY10. (3) Beijing Henglong JV is expected to start production by the year end 2011. (4) Exploring Western China market including catering to current customers’ expansion in those geographies and developing new customers who have market shares in the West. 

Guidance & Estimates: CAAS raised revenue guidance to ~30% Y-o-Y growth for FY10. We are modeling for revenue, net income and diluted EPS of $90.3 MM, $8.1 MM, and $0.26, respectively for 4Q10. This implies full year 2010 estimates of $335.7 MM, $35.1 MM, and $1.14. For FY11, our projections are maintained at $396.9 MM, $38.4 MM, and $1.24, respectively. 

Valuation: Currently CAAS is trading at ~14x and ~13x to our FY10 and FY11 EPS estimates. At our price target of $23.00 the company will trade at ~20.1x and ~18.6x to our FY10 and FY11 earnings estimate, compared to ~22x and ~18x for China listed peer companies and ~20x and ~15x for US listed companies.

Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & RenShaw Lowering Margin Expectations and Price Target,

2Q10 Results: CAAS today announced its 2Q10 earnings results with revenue and net income of $85.1 MM and $8.5 MM, with a diluted EPS of $0.28. This compares to our expectations of $77.6 MM, $8.0 MM, and $0.27, respectively. 

Top-Line Growth Remains Healthy: In 2Q10, CAAS grew its top-line by 36.2% Y-o-Y from $62.5 MM in 2Q09 to $85.1MM, aided by volume growth in China’s passenger vehicles and commercial vehicles. Steering parts for passenger vehicles continues to contribute the majority of the revenue, accounting for ~74% of total sales, while steering components for commercial vehicles contributed the rest ~26%. 

Auto Sales To Grow At A Slower Pace In 2H10: From January to July 2010, China’s total automobile production volume and sales volume reached 9.7 MM units and 8.2 MM units, implying a Y-o-Y growth of 39.4% and 28.6%, respectively. Industry average inventory days outstanding has been trending up since early this year, we believe this is signaling a slower sales growth for 2H10. 

 Margin Pressure To Continue: Gross margin of 23.3% in 2Q10 came in lower than our estimate of 27.5%. The lower gross margin was mainly driven by a ~4% Y-o-Y decline in ASP. We expect margin pressure to remain for the rest of the year and going forward into FY11 with total production volume, inventory levels and rising competition being the key variables. 

Electric Power Steering To Ramp Beyond FY11: During the earnings conference call, management stated that Electric Power Steering (EPS), which carries a higher gross margin, should materially improve the overall gross margin from FY12 since currently the order size of EPS is relatively small, only generating ~$0.8 MM in revenue during 2Q10. Management expects a meaningful ramp in EPS shipment beginning in FY12. 

Top Line Guidance Reaffirmed: Management reaffirmed its full year FY10 revenue guidance of ~25% top-line growth. We continue to believe that this top-line guidance may prove conservative given that management has a history of beating consensus on the top-line. 

Lowering Margin Expectations: We are now estimating gross margins to come in between 23% and 24% over the next few quarters. This results in our net income estimates for FY10 and FY11 to drop from $35.9 MM to $32.9 MM and $42.1 MM to $37.8 MM respectively. Similarly, our EPS projections for FY10 and FY11 drop from $1.19 to $1.08 and $1.38 to $1.22 respectively. 

 Valuation: Lowering PT To $23.00 

We are lowering our price target on CAAS from $30.00 to $23.00 driven by our lowered margin and earnings estimates. Currently CAAS is trading at ~17.4x and ~15.4x to our FY10 and FY11 EPS estimates.

   2010 Second Quarter Highlights:

    -- Net sales increased 36.2% YoY to a quarterly record of $85.1 million;
    -- Gross margin was 23.3% and operating margin was 16.1%;
    -- Net income rose 40.6% YoY to $8.5 million; diluted EPS of $0.28;
    -- Cash and equivalents were $45.2 million;
    -- Net cash flow from operations was $13.8 million; 

Mr. Qizhou Wu, Chief Executive Officer of China Automotive Systems commented, "We are very pleased to report our strong quarterly sales as we continue to set new records and expand our market share. Our customer base now consists of over 50 customers in a very diversified portfolio. As our product quality has been maintained at a high level and more OEMs recognize our safety track record, we see our penetration into existing and new customers increasing. On the export front, we are ramping up production for Chrysler as the US auto market is on a recovery track. We remain optimistic on the overall outlook for 2010, as the Chinese government's new subsidy policy continues to propel economy and fuel-efficient car sales."

Business Outlook:

Management maintains revenue guidance of 25% year-over-year growth for the 2010 fiscal year. This target is based on the Company's current views on operating and market conditions, which are subject to change. The Company will periodically update this guidance.

The Company adjusted upward its previously issued revenue guidance for 2009. The Company now expects its revenue to increase by more than 20% for the year 2009. This target is based on the Company's current contracts from existing customers, which are subject to change

^a The above forecasts reflect the Company's current and preliminary views and are therefore subject to change. Please refer to the Company's Safe Harbor Statement (usually in press releases) for the factors that could cause actual results to differ materially from those contained in any forward-looking statement.

Guidance Report

The Company reaffirms it 2009 guidance of 10 to 15 % revenue growth. We believe that the stimulus will continue to generate growth in the Chinese market and it has been reported that the Chinese Association of Automobile Manufacturers (CAAM) has increased its growth outlook for vehicle sales from 5% to 8.7% for the 2009 year.

Full Year Fiscal 2009 Guidance Ending December

Guidance Report:

"We believe the worst of the economic crisis in China is now behind us. In January 2009, China overtook the United States to become the world's largest automotive market. We anticipate that the stimulus packages in China will continue to generate greater economic activity, resulting in further growth in the domestic automotive market of 2009."

Full Year Fiscal 2009 Guidance Ending December

Source: PR Newswire (March 26, 2009)