ANALYSIS: At SORL Auto Parts, Subsidies Give Shares Upward Momentum

Shares in SORL Auto Parts have shown resilience and staying power as it has traded up 7 percent since the results were announced and are continuing to gain strength.

Author: CapitalWatch Staff   

By Steve Kanaval

As Chinese auto sales fell last year, many analysts predicted outright despair for the country's auto industry. While it may be true that China's auto industry is too large to see double-digit growth - the country accounts for about one-third of all auto sales produced globally each year - there is mounting optimism across the industry that sales will bounce back.

One of the biggest drivers in the auto industry's momentum is the prediction that vehicle sales will reach the smaller cities and rural areas. It is well known that China's large metropolitan areas are overly saturated with automobiles - a study from Bernstein, a respected research firm, is claiming that China is reaching the maximum level of cars per person, or 160 cars per 1,000 people.

But Beijing, which has typically avoided large tax cuts, is stimulating residents in smaller communities to trade in their older vehicles and offering subsidies to reinvigorate the industry.

This upward momentum was evident in SORL Auto Parts Inc. (Nasdaq: SORL) and its impressive 2018 financial results. The premium brake system manufacturer beat revenue estimates and saw its net income increase 15 percent year-over-year. Net sales totaled $123.3 million, nearly level compared with the same period a year earlier. However, revenue beat analysts' estimates, rising 14 percent to $71.4 million domestically and 20 percent internationally to $22.2 million. For the full year 2018, the company reported net sales of $468 million, at a 20 percent increase from 2017.

"We are pleased to report robust growth in sales to Chinese OEM market in the fourth quarter and another record top line in 2018, especially in the weakening economy in China," said Xiaoping Zhang, SORL's Chief Executive Officer and Chairman, in the company press release. "While we grew sales and expanded our market shares in all our three lines of business in 2018, we remained profitable and generated strong free cash flow."

After releasing these record results, SORL's stock went from $2.88 to $3.28 along with volume cresting over 1.3 million.

"Our broad range of advanced braking products enabled us to expand our customer base and grow our market share in China and abroad," Jinrui Yu, SORL's Chief Operating Officer, added. "We also invested over $55.4 million in property, plant and equipment in 2018 to enhance our production capacity and productivity. Our strengthened research and development program continues to develop technologies positioning us for ongoing growth in the future."

For this year, SORL expects net sales to reach $515 million with income exceeding $20 million. The stock has shown resilience and staying power as it has traded up 7 percent since the results were announced and are continuing to gain strength.

Positive news from the Trump administration and the current trade dispute would most likely push this stock higher and for technical analysts, you need a close above $4 and then $4.70. The real confirmation for these shares is trading volume and a close above $5.35.

In the near future, we see a test of these higher price levels for SORL as continued subsidies boost operating leverage for the company.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)