Sorl Auto Parts (NASDAQ:SORL)

First Quarter 2012 Financial Highlights

• Revenues for the first quarter of 2012 were $44.6 million;
• China domestic aftermarket sales rose 14.0% year-over-year;
• Gross margin was 27.4% in the first quarter of 2012;
• Net Income was $2.3 million, or $0.12 per diluted share, in the first quarter of 2012;
• Cash flow from operating activities was $4.3 million and free-cash-flow was generated.

Mr. Xiaoping Zhang, SORL's Chief Executive Officer and Chairman, stated, "We experienced severe headwinds from the domestic OEMs to international markets in this quarter. However, we outperformed the heavy duty truck market, as we benefited from our solid performance in our domestic aftermarket segment and through our continued efforts in fostering relations with our distributors and introducing new products to end customers. After the automotive market experienced a weak year in 2011, the sales decline in the Chinese truck OEM market continued to widen during the first quarter of 2012. Higher fuel price and slower construction activities continued to depress downstream customer demand for new trucks. We remain focused to expand our market share with OEMs through our broadened product offerings. As a result, our sales to the bus and construction equipment markets increased. For the first time in many years, our international sales suffered a sequential double-digit decline. While the unstable environment in the Middle East negatively impacted our sales in the region, we see good volume growth inEurope. "

Ms. Jinrui Yu, SORL's Chief Operating Officer, commented, "Our investments in higher- graded production equipment and new product development over the past two years started to generate positive outcomes. In an inflationary environment where labor costs are rising, we are proud to have maintained one of highest gross margins in the industry with our strengthened production efficiency and improved pricing power across all market segments. Our continued positive cash flows resulted from operating activities coupled with reduced capital expenditures, which enabled us to book solid free-cash-flow of nearly $4 million. We have significantly reduced short-term debt with increased receivable collections and expanded customer prepayments. With our improved financial standings, new products and enhanced operational fundamentals, we are well positioned to generate stronger earnings when market regains its growth momentum."

Business Outlook

For the second quarter of fiscal year 2012, management expects net sales to be approximately$225million and net income to be approximately $14.6million. These targets are based on the Company's current views on the operating and market conditions, which are subject to change.

"We will continue to benefit from the opportunities in the Chinese domestic aftermarket where the safety requirement bar has been raised. We are confident to maintain our OEM customer base and market position while penetrating new markets and earning new customers. Internationally, we plan to enhance SORL brand image through attendance of more industry exhibitions. More specifically, we will build a stronger international marketing network focused on exploring high-value foreign markets, and actively marketing to the large automotive chain stores that directly sell to end users," Ms. Yu concluded.

Fourth Quarter 2011 Results

• Record net sales were $56.1 million;
• Aftermarket and international market revenues increased 13.6% and 26.5%, respectively, versus the fourth quarter of 2010;
• Gross margin was 28.1%, compared with 27.5% in the same quarter of 2010 and 27.5%; in the third quarter of 2011;
• Net income attributable to stockholders for the fourth quarter of 2011 was $3.3 million, or $0.17 per diluted share.

Mr. Xiaoping Zhang, SORL Auto Parts' Chief Executive Officer and Chairman, stated, " 2011 was a difficult year for the Chinese commercial vehicle market due to the macro business environment and government monetary policies. We are very proud that we defended our OEM market share, further consolidated our leadership in the domestic aftermarket and strengthened our expansion in the international market segments. Over the years, our consistent delivery of products with excellent quality has further strengthened our relationships with OEMs as they remain highly selective of suppliers of safety-related auto components. In the aftermarket segment, we benefited from higher safety measures introduced by the Chinese government and our ongoing effort in building relationships with end customers through our robust nationwide distribution and marketing network. In the international markets, we continued to implement our globalization strategy by further expanding our global sales network. At the same time, our highly cost-effective products and newly developed, innovative products are helping us to further gain share in the international markets. Our continuing R&D investments started to bear fruit. The successful introduction of innovative products has earned us new customer wins and helped improve our profitability. Also, our further investment in modern machinery equipment has enabled us to offset the pressure from rising labor costs and raw material increases. Going forward, we will continue to diversify our product offerings and further the integration of our sales network and end markets. We are confident of our ability to maintain steady progress despite the uncertain market conditions."

Business Outlook

We project approximately $234 million of sales revenue and $18.7 million of net income attributable to our common stockholders for the full year ending December 31, 2012. "We remain cautiously optimistic as Chinese OEM market still awaits catalyst. We will continue to increase production efficiency and improve product mix. Our success in maintaining domestic OEMs sales in 2011 has proven SORL's resilience and competitiveness in a soft OEM market. We continue to execute our international expansion strategy and build a stronger international foothold in 2012, as we expect more new customer wins in many emerging markets." Mr. Zhang concluded.

ZHEJIANG, China, March 8, 2012 /PRNewswire-Asia-FirstCall/ -- SORL Auto Parts, Inc. (NASDAQ: SORL) ("SORL" or "the Company"), a leading supplier of brake and control systems to the global commercial vehicle industry, today announced the appointment of Ms. Jinrui Yu as the Company's Chief Operating Officer, effective immediately. Mr. Baojian Tao, who served as the Company's Chief Operating Officer, resigned from his position as such for personal reasons, effective March 3, 2012.

Ms. Yu, age 37, has more than 15 years of experience in the auto parts industry. Ms. Yu has served as the Company's Production and Export Vice President since August 2009. From 2004 to 2009, Ms. Yu served as the Company's Export Department Manager. From 1999 to 2004, Ms. Yu served as International Sales Manager of Ruili Group Co., Ltd, which specializes in manufacturing auto parts, and from 1997 to 1999, Ms. Yu worked in the OEM market sales department of Ruili Group Co., Ltd.

Mr. Xiaoping Zhang, Chief Executive Officer and Chairman of the Board of the Company, said, "We thank Baojian Tao for his leadership and many contributions during an important growth period in SORL's history. We wish him well in his future endeavors. Ms. Yu has demonstrated that her capabilities and extensive knowledge of our operations will ensure a smooth succession. We look forward to Ms. Yu's continuing contributions to the Company as our new Chief Operating Officer.

Third Quarter 2011 Results

Rodman and Renshaw on SORL                        8/17/2011

SORL: 2Q11 Earnings Update; Lowering PT to $10.00

2Q11 Results: SORL reported 2Q11 revenue, earnings, and diluted EPS of $61.1 MM, $5.0 MM, and $0.26, compared to our estimates of ~$63.7 MM, $5.7 MM and $0.29, respectively. Top-line grew by 10.8% y-o-y from $55.2 MM in 2Q10 and 17.5% sequentially from $52.0 MM in 1Q11. Gross profit of $16.6 MM represented a 1.3% y-o-y increase or gross margin of 27.1%, compared to $16.4 MM or 29.7% margin in 2Q10 and $14.6 MM or 28.1% margin in 1Q11. Bottom-line was recorded at $5.0 MM, a 12% decline from $5.6 MM of earnings in 2Q10. Diluted EPS was down 16.7% from last year at $0.26 per share. The company ended the quarter with cash balance of $14.2 MM, $71.8 MM in A/R, and $42.1 MM in inventories.

Revenue Mix: During 2Q, by market segments, China OEM, China Aftermarket, and International Sales contributed $32.6 MM, $12.7 MM, and $15.7 MM in revenue, accounting for 53.4%, 20.8%, and 25.7% of total quarterly sales. The three market segments each grew by (6.1%), 84.1%, and 15.4% y-o-y. By vehicle types, commercial vehicle brake systems contributed 78.9% of 2Q11 sales up 12.1% y-o-y, while passenger vehicle brake systems accounted for 21.1%, growing by 4.9% y-o-y.

Margins In-line, but Pressure Remains: Gross margin came in at 27.1% versus our expected 27.5% and 2Q10’s 29.7%, and net income margin of 8.1% compared to our estimate of 8.9% and lower than 2Q10’s 10.2%. The decrease in margins reflects the inflation in raw materials and labor costs. According to management, cost of purchasing steel and aluminum parts each increased by ~7.9% and ~1.5% y-o-y.

3Q11 Guidance Weaker: The company provided 3Q11 guidance with revenue of $45 MM and net income of $3.6 MM, indicating a y-o-y decline of 11.4% and 28%, respectively. This is driven by management’s weaker expectation for SORL’s OEM segment. Management aims to offset this near term weakness by continuing it efforts in R&D to launch higher margin products and maintain strategic relationship with its OEM customers.

Revising Estimates: Given the headwinds in SORL’s OEM business, we are lowering our 3Q11 estimates for revenue, net income, and EPS to $45.8 MM, $3.5 MM, and $0.18, respectively. For full year FY11, we are revising estimates to $212.7 MM, $17.6 MM, and $0.91. We are also introducing our FY12 estimates of $243.2 MM, $19.6 MM, and $1.02, respectively.

Lowering PT to $10.00: We also believe investors will look for improvements in balance sheet and cash flow metrics before being comfortable in assigning the company a higher valuation multiple. In line with our lowered financial projections we are also lowering our price target on SORL from $18.00 to $10.00. Our new price target translates into a P/E multiple of ~10x with respect to our EPS estimates for FY12. At current levels the stock is trading at ~3.85x and ~3.44x to our new FY11 and FY12 EPS estimates.

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.

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 SIPC.
Member FINRA.

Rodman and Renshaw SORL                            5/16/2011

SORL: 1Q11 Earnings Update

1Q11 Results: SORL reported 1Q11 revenue, earnings, and diluted EPS of $52 MM, $4.9 MM, and $0.25, compared to our estimates of ~$49.7 MM, $4.9 MM and $0.26, respectively. Top-line grew by 34.6% y-o-y from $38.6 MM in 1Q10 but down 5.1% sequentially from $54.8 MM. Gross profit of $14.6 MM represented a 25.6% y-o-y increase and a 28.1% in gross margin, compared to $11.6 MM or 30.1% margin in 1Q10 and $15.6 MM or 28.5% margin in 4Q10. Selling expenses were up 27.2% y-o-y from $2.4 MM to $3.1 MM, accounting for 5.9% of total revenue compared to 6.2% in 1Q10. Bottom-line was recorded at $4.9 MM, a 34% increase from $3.6 MM of earnings in 1Q10. Diluted EPS was up 31% from last year at $0.25 per share.

Revenue Mix: During 1Q, by market segments, China OEM, China Aftermarket, and International Sales contributed $32.0 MM, $8.6 MM, and $11.4 MM in revenue, accounting for 61.5%, 16.5%, and 21.9% of total quarterly sales. The three market segments each grew by 39.7%, 32.3%, and 23.9% y-o-y. By vehicle types, commercial vehicle brake systems contributed 78.9% of 1Q11 sales up 39.2% y-o-y, while newly acquired passenger vehicle brake systems accounted for $10.9 MM, or 21%, a 20.2% y-o-y increase.

Potential Margin Headwind: Overall gross margin was down in the quarter to 28.1% from 30.1% a year ago due to a higher raw material price and labor cost. By vehicle types, commercial vehicle brake systems generated 26.1% in margin, compared to 35.4% for passenger vehicle brake systems. During the conference call management acknowledged the margin pressure going into the second half of the year, but expects offset it by efficient production and continued introduction of new higher margin products. The company indicated that they are able to partially pass on the rising raw material cost to its domestic and overseas aftermarket customers while it remains difficult to pass on costs to OEM majors.

2Q11 Guidance: Management is guiding for revenue and earnings of ~$65 MM and ~$6.1 MM, which came in line with our expectations. SORL is cautiously optimistic on its outlook for 2011 given that it is well positioned in medium/light truck market, which grew decently by ~28% y-o-y, while revenue from heavy truck market was down by 21% y-o-y. The company expects approximately $5.0 MM in CapEx throughout FY11.

Our Estimates: For 2Q11, we are now projecting $63.7 MM for top-line, $5.7 MM for bottom-line, and $0.29 for diluted EPS. For full year numbers, our estimates are $251.7 MM, $22.7 MM, and $1.18 per share, respectively. This includes an overall gross margin and EBIT margin expectations of 27.6% and 11.9%.

Valuation: At current levels the stock is trading at 4.9x to our FY11 EPS estimates. We are comfortable maintaining our price target of $18.00 for SORL, which translates into a P/E multiple of ~15x with respect to our EPS estimates for FY11.

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 and Renshaw on SORL                         3/30/2011

SORL: 4Q10 Earnings Update

4Q10 Beat: SORL reported 4Q10 revenue, earnings, and diluted EPS of $54.8 MM, $5.9 MM, and $0.31, beating our estimates of ~$51.4 MM, $4.6 MM and $0.24, respectively. Top-line grew by 19.4% y-o-y from $45.9 MM in 4Q09 and 7.8% sequentially from $50.8 MM. Gross profit of $15.6 MM represented a 4.3% y-o-y increase and a 28.5% in gross margin, compared to $15.0 MM or 32.7% margin in 4Q09 and $14.5 MM or 28.6% margin in 3Q10. Selling expenses were up 30.2% y-o-y from $3.2 MM to $4.1 MM, accounting for 7.5% of total revenue compared to 6.9% in 4Q09. Bottom-line was recorded at $5.9 MM, a 5.6% increase from $5.6 MM of earnings in 4Q09. Diluted EPS was flat from last year at $0.31 per share.

Key Takeaways: SORL’s stock has been impacted by downgrades and price target cuts post its fourth quarter earnings announcement. We were pleased with company’s overall performance, which was partly driven by efforts undertaken over the past twelve months to diversify into the passenger vehicle market, export opportunities and improvements in the after-markets business. The company has also demonstrated margin stability in a very competitive environment. We believe SORL remains well positioned for 2011. The company’s ability to launch more technology intensive products will determine margin integrity in the business.

Margin Outlook: Gross margin was slightly down in FY10 from 30.4% to 29.2% due to higher raw material cost and pricing pressure from intense competition. Currently 59% of revenue is generated from SORL’s OEM customers, in which SORL has a relatively lower pricing power compared to aftermarket. Headwinds in margins include (1) slower end user demand growth due to high oil price (2) raw material cost (3) increasing labor cost across China. Going into FY11, SORL expects a gross margin range of 27.5% ~ 28%. The company intends to maintain its margin by launching new, higher-margin products to domestic customers and faster expansion in international sales.

1Q11 Guidance: SORL is guiding for revenue and net income of $50.0 MM and $4.6 MM for 1Q11. We revised our estimates for top-line, bottom-line, and diluted EPS of $49.7 MM, $4.9 MM, and $0.26, respectively. For full year FY11, our projections are now $249.4 MM, $25.2 MM, and $1.30.

Valuation: We believe that SORL should benefit from a) new product introductions, b) government’s extensive road projects, c) increased urbanization and heavy reliance on public transport, d) acquisition / partnership opportunities and e) healthy balance sheet. At current levels the stock is trading at 4.9x to our FY11 EPS estimates. We are comfortable maintaining our price target of $18.00 for SORL, which translates into a P/E multiple of ~14x with respect to our EPS estimates for FY11. This compares to an average forward FY11 P/E multiple of ~16.8x for similar companies listed in China and ~13.4x for those listed in the US.

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.

Fourth Quarter Results:

• SORL's consolidated net sales were $54.8 million, an $8.9 million or 19.4% increase over the $45.9 million in the same quarter of 2009
• SORL's consolidated gross profit was $15.6 million for the fourth quarter of 2010, a 4.3%  increase or $0.6 million, from $15.0 million for the fourth quarter of 2009.
• SORL's consolidated net income attributable to stockholders for the 2010 fourth quarter was $5.9 million, or $0.31 per diluted share, a 5.6% gain over the $5.6 million, or $0.30 per diluted share, in the year ago fourth quarter.

Mr. Xiaoping Zhang, SORL Auto Parts' Chief Executive Officer and Chairman, stated, "Our 2010 fourth quarter continued our growth trend as the Chinese economy continued to expand.  We benefited from higher demand for commercial vehicles due to the investment in infrastructure by the Chinese government, the expansion of the highway system allowing for more goods to shipped longer distances, and greater bus production to move people.  Additionally, through SORL's acquisition of certain assets of the auto parts business of the Ruili Group, we now are selling into the passenger vehicle market and offer a broader line of products."

We project approximately $50.0 million of sales revenue and $4.6 million of net income attributable to our common stockholders for the first quarter ending March 31, 2011.

Rodman & Renshaw on SORL                                      01/18/2011

SORL Auto Parts, Inc.


SORL: Fundamentals Remain Intact; Maintaining Outperform 

No News Around Last Week’s Pull Back: SORL’s stock pulled back ~7.7% last Friday. We don’t believe this pull back was driven by any news or fundamental changes to the company’s business. However, small cap Chinese companies that have undertaken M&A transactions have been facing investor scrutiny recently for deal transparency. The pull back in SORL may have occurred in sympathy with these developments. Management has disclosed that the valuation and asset appraisal on SORL’s recent $25 MM acquisition of the passenger vehicle related business from the Ruili Group was undertaken by DTZ Debenham Tie Leung Limited ("DTZ"). Management indicates that valuation was driven by asset appraisal vs. earnings. However, if we consider the expected $35 MM and $4 MM revenue and net income contribution from this acquisition in 2011, the valuation appears to be in line with that being assigned to small cap Chinese auto component names trading in the US and a significant discount to averages in China. We also believe this acquisition is a step towards reducing related party transactions in SORL’s business. At current levels the stock remains attractive to us and we maintain our 4Q10 revenue, net income and EPS estimates of ~$51.4 MM, $4.6 MM and $0.24.

Valuation: At current levels the stock is trading at 8.2x and 6.0x to our FY10 and FY11 EPS estimates. We are comfortable maintaining our price target of $18.00 for SORL, which translates into a P/E multiple of ~19x and ~14x with respect to our EPS estimates for FY10 and FY11. This compares to an average forward FY11 P/E multiple of ~15.8x for similar companies listed in China and ~17.2x for those listed in the US. We believe SORL deserves an in-line valuation to its peers as the company is proactively introducing higher margin products, expanding internationally and has now entered the passenger vehicle market. These drivers should allow the company to sustainably exceed industry growth rates over the next two years.

Risks

Lower aftermarket demand, b) Production concentrated at single site, and c) Cyclical nature of the commercial vehicles industry

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.

ZHEJIANG, China, Dec. 21, 2010 /PRNewswire-Asia/ -- SORL Auto Parts, Inc. , announced today that the Yutong Group, Asia's largest bus manufacturer, has agreed to purchase disc spring chambers exclusively from SORL in 2011, replacing imported products that Yutong had previously purchased.

The new orders are expected to increase SORL's 2011 sales to the Yutong Group by 100%. Sales to the entire bus market in 2011 are expected to reach RMB 50 million, more than a 100% increase compared with bus sales in 2010. The Company's market share in the bus market is expected to rapidly expand with these new orders.  

SORL entered the bus market in 2007 and has already established long-term relationships with leading domestic bus original equipment manufacturers ("OEMs), mainly supplying air brake products for buses in intra-city long-haul transportation. New orders for disc brake products received in November 2010 will also help the Company further expand in the long-distance bus market.

Mr. Baojian Tao, Chief Operating Officer of SORL, commented, "We are very pleased to achieve this new breakthrough in the growing Chinese bus market as disc brake products are a new growth area for the Company. As one of our leading markets, the bus market has achieved rapid growth in recent years. Successfully replacing imported products demonstrates the increasing quality and higher technology content of our products to meet global safety standards. We are continuing to enhance our technological innovation, further improve our product quality, and introduce more new, advanced products to expand our market share and increase our earnings."    

Rodman & Renshaw on SORL                                       12/21/2010

SORL: An Import Substitution Option; Sales To Yutong Double in 2011 

Yutong’s Orders: SORL announced that it has signed exclusive supply agreement with Yutong Group (the parent company of Zhengzhou Yutong Bus Co., Ltd: 600066-SHG, Not Rated) for SORL’s disc spring chamber products. Yutong is the largest bus manufacturer in Asia and also the biggest producer of mid/large sized buses in the world. Sales to Yutong are expected to double in FY11, while the company’s bus component sales for FY11 are set to grow at least 100% to approximately RMB 50 MM (~$7.5 MM). These new orders from Yutong will make SORL its sole supplier of disc spring chambers, entirely replacing imports.

Key Takeaways: We are not entirely surprised by this announcement given that SORL’s market share gain story continues to play out. The company is very well positioned to evolve into an alternative quality play to more expensive imported auto parts given its cost advantage, quality assurance, and R&D efforts. With the recognition from well established majors like Yutong we expect similar wins at other OEMs in the future. We continue to maintain that investors looking at auto component opportunities in China should prioritize SORL as an option.

Valuation: At current levels the stock is trading at 9.0x and 6.6x to our FY10 and FY11 EPS estimates. We are comfortable maintaining our price target of $18.00 for SORL, which translates into a P/E multiple of ~19x and ~14x with respect to our EPS estimates for FY10 and FY11. This compares to an average forward FY11 P/E multiple of ~17x for similar companies listed in China and ~16.8x for those listed in the US. We believe SORL deserves an in-line valuation to its peers as the company is proactively introducing higher margin products, expanding internationally and has now entered the passenger vehicle market. These drivers should allow the company to sustainably exceed industry growth rates over the next two years.

Risks: Lower aftermarket demand, b) Production concentrated at single site, and c) Cyclical nature of the commercial vehicles industry

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 on SORL

Overview: SORL reported its 3Q10 revenue net income and EPS of $50.8 MM, $5.0 MM and $0.26, beating our expectations of $45.3 MM, $4.0 MM, $0.21, respectively. The result also came in better than the street consensus of $46.1 MM, $4.1 MM, and $0.21. Total revenue (including sales to related parties) grew by 31.2% Y-o-Y from $38.7 MM in 3Q09 and 1.8% sequentially from $49.9 MM in 2Q10, driven by strong OEM business and export market. Gross profit was recorded at $14.5 MM, or 28.6% in margin, compared to $11.0 MM or 28.3% in 3Q09 and $13.5 MM or 27.0% in 2Q10. The company delivered a net income of $5.0 MM, compared to $4.2 MM in 3Q09 and $5.4 MM in 2Q10. Diluted EPS was $0.26, on a fully diluted share count of 19.3 MM. SORL ended 3Q10 with a total of $2.2 MM in cash, accounts receivable of $52.3 MM, inventory of $28.0 MM, and short-term bank loans of $9.4 MM. 

Strong Organic Growth: Excluding the revenue contribution from newly acquired Ruili Group, the organic SORL revenue was $47.9 MM for the quarter, growing by 40.6% Y-o-Y from $34.0 MM in 3Q09. By business segments, Domestic OEM, Domestic Aftermarket, and Export segment each contributed $25.0 MM, $9.4 MM, and $13.4 MM in revenue, accounting for 52%, 20%, and 28% of total sales, respectively. Top-line growth was mainly fueled by a strong China OEM sales and export sales, growing by 43.7% and 71.8% Y-o-Y, respectively. 

Higher Gross Margin: Overall gross profit for the quarter reached $14.5 MM, or 28.6% in margin, compared to $11.0 MM or 28.3% in 3Q09 and $13.5 MM or 27.0% in 2Q10. The gross margin improvement was attributable to the company’s continued efforts in adding high margin products and a larger contribution from exports. 

Continues To Spend On R&D: R&D expenses were $1.8 MM for the quarter, up from $0.6 MM in 3Q09 and $1.7 MM in 2Q10. Excluding Ruili Group acquisition, R&D spending was $1.6 MM. The company is investing in new product development, including upgrading traditional valves and developing electronic products. We believe the company’s continued efforts on new product launches should support its gross margin in mid/long-term horizon. 

Guidance & Estimates: Management is guiding for full year revenue and net income of $183 MM and $18 MM. For 4Q10 we expect the company to generate revenue, net income, and diluted EPS of $51.4 MM, $4.6 MM, and $0.24, implying full year numbers of $186.2 MM, $18.1 MM, and $0.95, respectively. For FY11 our estimates are $238.7 MM, $25.0 MM, and $1.30. We believe SORL should be the ‘go to’ Chinese auto component for investors given the company’s relatively higher margins, acquired exposure to passenger segment, positioning in the after markets space and ramp in international sales. 

Valuation: At current levels the stock is trading at 9.9x and 7.2x to our FY10 and FY11 EPS estimates. We are comfortable maintaining our price target of $18.00 for SORL, which translates into a P/E multiple of ~19x and ~14x with respect to our EPS estimates for FY10 and FY11.

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.

Third Quarter Financial Highlights

• SORL Net sales rose 40.8% from the third quarter of 2009;

• SORL OEM sales were up 43.7% year-over-year;

• SORL Export sales were up 71.8% year-over-year;

• SORL Gross margin was 28.0% up from 27.1% in the preceding quarter;

• SORL Net income rose 27.8% year-over-year; with diluted EPS of $0.25 vs. $0.21;

• SORL Net cash flows from operating activities were $19.3 million, up from negative $2.2 million in the third quarter of 2009.

Mr. Xiaoping Zhang, SORL Auto Parts' Chief Executive Officer and Chairman, stated, "We are very pleased with our financial performance in the third quarter of 2010.We benefited from the robust growth of China's economy and especially the automotive industry. Sales of our new model products, applicable to both OEM and aftermarket also grew in the third quarter of 2010. OEM sales rose as we promoted our integrated systems and modular supplies to them. Export sales growth reflects more confidence in a global economic recovery. We will continue with our strategies to further optimize our international sales network to help further penetrate into new markets. Also, we are enhancing investment in new product development to create higher-margin advanced products to increase both our OEM and aftermarket sales."

Business outlook:

We project approximately $183 million of sales revenue and $18 million of net income attributable to our common stockholders for the full year ending December 31, 2010.

   Second Quarter Financial Highlights:

• Revenues rose 67.8% year-over-year to a quarterly record of $49.9 million.
  
• Gross profit rose 60.0% year-over-year to a quarterly record of $13.5 million Net income increased 79.7% year-over-year to a quarterly record of $5.4 million.
  
• Fully diluted earnings per share were a quarterly record of $0.28 compared with $0.16 in the 2009 second quarter.
  
• OEM sales rose 121.3% year-over-year to $31.2 million and internationalmarket sales rose 42.9% to $12.0 million.
  
• The Company was awarded five patents during the quarter, including one invention patent from the United States Patents and Trademark Office.

Mr. Xiaoping Zhang, SORL Auto Parts' Chief Executive Officer and Chairman, stated, "We are very excited about our second quarter results as we exceeded our guidance. Our strong momentum in the OEM business, especially in the more profitable heavy-duty truck segment, substantially outpaced overall market growth, showing the effectiveness of our branding strategy and customer relationship efforts. We strive to continue to improve our products' quality and safety. On the product development front, the new products we introduced have been well received by our domestic and international customers. Despite cost pressure from raw materials and payroll growth, we continue to optimize our product mix by rolling out more value-added new products to maintain an attractive margin."

Business outlook

For the third quarter of fiscal year 2010, management is expecting net sales to be approximately $45 million and net income to be approximately $4 million. These targets are based on the Company's current views on the operating and market conditions, which are subject to change.

Mr. Zhang commented, "Entering into second half of 2010, we remain bullish, particularly about our domestic aftermarket business, as more and more trucks on the road need high-quality replacement brake systems, and as our OEM business continues to enhance our brand recognition in the replacement market. We expect that our OEM business growth will stabilize in the second half of 2010, after experiencing rapid growth in the first half. We expect cash flow to improve in the second half of 2010, because our capacity expansion is ahead of schedule and the majority of capital expenditures for 2010 already occurred in the first half of 2010, and because a significant amount of short-term receivables are due shortly. On the cost side, we anticipate that steel and aluminum prices will ease, relieving margin pressure. Overall, growth in the second half of 2010 will be solid as we also launch new products with higher price points, and, combined with improved material costs, should allow us maintain high profitability."

Mr. Xiaoping Zhang, SORL Auto Parts' Chief Executive Officer and Chairman, stated, "We are very pleased with our financial performance in the first quarter of 2010. Higher transportation needs for supplies and resources due to rapid urban expansion in interior mainland China caused surging demand for trucks in the first quarter. While commercial vehicle OEMs are ramping up production as they are reaching the limits of their current capacities, they keep auto parts suppliers, especially safety-related components and system producers, on a tight production schedule. We have carefully increased our production and continue to focus on quality assurance. As the truck replacement cycle approaches, under stricter government emission control measures, we also introduced a series of new products into the marketplace. These new products feature new functionalities, not only targeted at fuel-efficiency-conscious customers, but to strengthen driver safety and comfort. As a result of our product mix shift toward high-value-added products, our margin improved."

For the second quarter of fiscal year 2010, management is expecting:

• Net sales to be approximately $47.0 million
• Net income to be approximately $4.3 million, compared with net sales of $29.7 million and net income of $3.0 million for 2009 second quarter.

These targets are based on the Company's current views on the operating and market conditions, which are subject to change.