Wonder Auto Technology, Inc.
(Nasdaq: WATG)
Liaoning, China
Web Site:
www.wonderautotech.com
Wonder Auto Technology is the second- largest manufacturer of starters and
alternators in China. The stock offers growth investors an excellent opportunity
to play the burgeoning Chinese auto sector, which surpassed Japan in 2006 to
become the world's second-largest market for vehicle sales after the United
States.
A major advantage in China is the potential size of the auto market that is
driven by the rising wealth of the 250 million middle class, where car ownership
is a reflection of status. The size of the passenger vehicle market in China
surged 26% year-over-year in the first half of 2007 and has grown at over 20%
annually since 2004, according to R. L. Polk. Many pundits forecast that China
will become the world's second- largest producer of vehicles by 2013
This low-cost, high-technology manufacturer has set an aggressive growth
strategy that includes expansion to markets outside of its core China market,
including South Korea and the European Union. The company recently> opened an
office in Detroit that will focus on expanding into the North American OEM and
auto parts aftermarket, which would be a significant development. Wonder plans
to derive as much as 30% from export sales over the next five years, up from the
10% in the third quarter of 2007. The company believes that its low-cost,
high-quality approach coupled with world-class manufacturing experience will
serve it well internationally.
A key advantage of Wonder is its extensive product pipeline and flexibility to
produce according to different specifications depending on the needs of the
client.Wonder owns 14 starter- and alternator-related patents in China and can
produce 150 different alternators, and 70 types of starters and
suspension-related parts.
As far as research and development,Wonder also has a strategic manufacturing
alliance with Korea Hivron automobile electric company, focused on the research
and development of advanced automobile electric technologies, products and
processes.
Wonder's goal is to be the number one alternator and starter manufacturer in
China by 2008. The company is working on 20 new starter/alternator development
programs for existing customers, with delivery within two years.
Future growth is expected to emerge from a burgeoning auto parts aftermarket in
China, according to Wonder. To set the stage for this to happen, the company has
established a strong dealer network in China through its OEM relationships.
Financial Results
Wonder's financial results have been truly impressive. Revenue increased by
41% to a record $102 million in 2007. Net income increased by 76.5% to $14.5
million, or $0.60 per diluted share, for the year in 2007.
Gross profit for the 2007 year increased 73% to US$25.6 million, representing a
margin of 25.1% of sales as compared to US$14.8 million, or a margin of 20.5%
for 2006. Gross margin improvement was mainly due to economies-of-scale,
research and development reducing costs, emphasizing larger orders from
customers, efficient cost controls and the addition of Jinzhou Wanyou.
Total cash as of Dec. 31, 2007 totaled US$34.7 million as compared to US$13
million as of Dec. 31, 2006. Long-term debt was US$17.6 million.
Guidance and Outlook
The company expects to exceed $140 million in revenues in 2008, an increase
of nearly 40% from 2007. Wonder projects a 38% increase in net profit for 2007,
to $20 million.
For 2008, the consensus analyst estimate calls for Wonder to make $0.79 per
diluted share, up 31% year-over-year, on projected revenue growth of 42% to $145
million. Earnings in 2009 are expected to rise to $0.99 per diluted share, up
25%. Revenues in 2009 are projected to increase 38% year-over-year to $200.1
million.
Concluding Remarks
Wonder shares currently trade at 11 times the 2008 estimate and a very low
nine times the forward year estimates. For a firm expected to grow its revenues
by about 42% in 2008 and a further 38% in 2009, these trading multiples are
surprisingly low.
Given the strong industry fundamentals and market size in China, we believe
Wonder is ideally set for some superlative growth in the years ahead. We
currently have a target price of $11 on WATG, but we believe the stock is an
attractive buy even at a $14 price.
