Wonder Auto Tech (PINK:WATG)

Rodman and Renshaw on WATG                                         5/2/2011

WATG: Terminating Coverage

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

Financial Restatement

WATG announced that its historical financial statements for quarterly and annual financial results from 1Q08 to 4Q09 should no longer be relied upon due to a cutoff error on the timing of revenue. As of now, it is difficult to assess how this is going to affect WATG’s numbers, but management expects the adjustment to increase the revenue and earnings for those periods. WATG is still in the process of reviewing this issue and no time line for the restatement has been provided. Following this development, we put our rating on WATG Under Review and removed our financial projections.

Nasdaq Letter: On March 25, 2011, WATG announced that the company has received a letter from Nasdaq indicating that the company was not in compliance with the continued listing requirements under Nasdaq Listing Rule 5250(c)(1), the timely filing rule. According to the letter, WATG has 60 calendar days or until May 23, 2011 to submit a plan to Nasdaq to regain compliance status, which, if accepted by Nasdaq, may grant WATG an extension of up to 180 calendar days for filing the 10-K form.

Company Description

Headquartered in Jinzhou City of Liaoning Province, Wonder Auto Technology Inc. (WATG) is a manufacturer and distributor of automotive electrical parts such as alternators, starters, engine valves and tappets, and shock absorber rods in China. The company’s customer base includes a wide range of automakers, engine producers and auto parts suppliers in the domestic market and abroad. It is the second largest supplier for alternators and starters, and the largest supplier of engine valves and tappets in the Chinese auto parts market. It is also the largest independent supplier for shock absorber rods in China. As of Dec-08, the company had 4 alternator assembly lines, 4 starter assembly lines, 3 rods and shafts production lines, 20 engine valves production lines, and 5 tappets production lines. As of Jun-09, the company had an annual production capacity of 5MM alternators and starters, 15MM shock absorber rods, 15MM engine valves, and 8MM valve tappets. All the production lines are located in facilities at Jinzhou and Shandong. The company has four R&D centers with a technical team of 163 members, involved in new product development including design, testing and production.


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 WATG

We believe the restatements should have only minor impact on the financials in the last three years. The restatements were due to a cutoff error in the timing of revenue recognition. So far the net effect is expected to be an increase in revenue and net income in 2008 and 2009. We expect only a minimal impact on 2010. The company still expects to meet its previously provided revenue and profit guidance for 2010. Due to the restatement, we expect a slight delay in the filing of its 2010 10K, which we expect to be released at the end of March or first half of April. We expect Q4 and FY10 results to exceed the company's guidance and our previous estimates.

Net/Net: We increased our 2010 estimates and maintained 2011-2012 estimates. Shares are trading at 4.5x our FY11 EPS. We reiterate our Buy rating and $14 price target, which is 10.4x our FY11 EPS.

Rodman and Renshaw on WATG           

WATG: Putting Our Rating Under Review 

Restatement: WATG announced that its historical financial statements for quarterly and annual financial results from 1Q08 to 4Q09 should no longer be relied upon due to a cutoff error on the timing of revenue. As of now, it is difficult to assess how this is going to affect WATG’s numbers, but management expects the adjustment to increase the revenue and earnings for those periods. WATG is still in the process of reviewing this issue and no time line for the restatement has been provided. 

Rating Under Review: We are putting our rating on WATG under review from a Market Outperform rating previously. This rating change is due to the announced re-statements. In line with this we are removing our financial projections for the company. The company intends to have PricewaterhouseCoopers Zhong Tian CPAs Limited Company re-audit its financial statements for FY08 to FY09. We are uncertain as to whether the company will be able to file its upcoming 10K and 10Q on a timely basis given this development. We will revisit our financial projections and rating once management finishes the re-auditing process and files its 10-K/10-Q forms with SEC. WATG continues to expect to meet the previously announced guidance for revenue and profit in its press release dated November 9, 2010.



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 WATG

As expected from our 11/5 published note read “WATG: Raising Ests/Expecting Beat- Reiterate Buy (GHS)” ……

(WATG) reported Q3 ahead of our/consensus estimates. Revenue and gross margin were both better than expected, while the bottom line was complicated by higher professional fees related to the Jinheng acquisition and a $5.3MM gain on disposal of Applaud Group. Net margin remained in line excluding non recurring items. Q3 revenue grew 34% YoY due to contribution from Jinheng in addition to 18% organic growth of legacy businesses. Management raised its FY10 guidance. We consider the Jinheng acquisition as a positive development given that it further enlarges and diversifies the offering portfolio. We continue to like the long term fundamentals of the company and believe the business is positioned to benefit from the long-term growth perspective and consolidation opportunity in China’s auto industry. Shares are trading at 7.3x our FY11 EPS estimate. We believe the company is looking for paths to unlock shareholder value. We expect several near term catalysts, including a potential upgrade to a Big Four auditor and other strategic moves. We reiterate our Buy rating and $14 price target.

Maintaining Buy. We continue to like the fundamentals of the company given management's execution capability and forward vision for future growth. We believe the company is well positioned to benefit from the long term auto industry growth and consolidation opportunities in the market. We expect several near term catalysts to help unlock shareholders' value, including a potential upgrade to a Big Four auditor and other strategic moves. Shares are trading at 7.3x our FY11 adjusted EPS estimate. We maintain our Buy rating and $14 price target.

Rodman & Renshaw on WATG

Overview: WATG reported 3Q10 revenue of $78.8 MM and US-GAAP net income of $11.9 MM, with GAAP EPS of $0.35. On a Non-GAAP basis, the adjusted net income and EPS are $13.6 MM and $0.40, respectively. This beat our estimates of $66.5 MM in revenue and $6.0 MM in GAAP net income and $7.6 MM in Non-GAAP earnings. 

Margin Improvement Aided By Favorable Revenue Mix: Gross margin stood at 26.2%, higher than 23.7% in 3Q09 and 25.1% in 2Q10. This was primarily due to an increased portion of revenue contributed by heavy duty engine valve products relative to light duty engine valve products. The higher overall GM was also partially attributable to improved margins in rods and shafts. 

Balance Sheet: WATG ended this quarter with $60.6 MM in cash, $99.6 MM of accounts receivable, $82.6 MM of inventory, and total borrowing of $139.3 MM. DSO during the quarter was ~100.3 days, compared to 2Q10’s 71.2 days and 3Q09’s 107.0 days. 

Key Takeaways: WATG’s 3Q10 results included several one-time gains and expenses partly driven by acquisitions that took place in 3Q10. Some of these expenses and gains may continue to show up in 4Q10 results. Investors should view the company’s performance from an operating perspective in the near term to avoid any confusion surrounding earnings. We believe management’s execution abilities on integrating the recent acquisitions will have an impact on the company’s performance over the next 12 months. In line with that, investors should also monitor the company’s working capital requirements and ability to maintain margins. Given the strength in passenger and commercial vehicle sales in China currently, we would not be surprised if the top line guidance provided proves to be conservative. However, a multiple expansion will primarily be driven by margin stability and cash flow improvements. 

4Q10 & FY11 Estimates: For 4Q10 we are expecting revenue and GAAP net income of $100.9 MM and $9.2 MM, with diluted EPS of $0.27. On a Non-GAAP basis, our net income and EPS projections are $10.8 MM and $0.31 per share. This implies full year estimates of $311.8 MM, $28.0 MM (GAAP), and $0.82 (GAAP). We are introducing FY11 estimates with revenue and GAAP net income of $419.6 MM, $39.1 MM, and $1.15, respectively based on US-GAAP. 

Valuation: Currently WATG is trading at a P/E multiple of ~9.8x and ~7.4x to our FY10 and FY11 Non-GAAP earnings estimates. This multiple is below industry averages for similar players in the US and China. We believe WATG should be trading at industry averages given the growth opportunity associated with it. We are comfortable maintaining our $15 price target on WATG, which translates into P/E multiple of ~15x and ~11x to our 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.