Check on China: SORL Auto Parts

Rating:

The transport of people, materials and goods are crucial to China's monumental infrastructure build-out and its continued economic development. The nation's growth is pushing demand ever higher for passenger bus and commercial truck fleets, which is evidenced by a surge in truck and bus sales in China. In 2007, light truck sales rose 16%, heavy-duty truck sales soared $60% and bus sales were up some 20%.

As the demand for commercial vehicles continues to grow, the fortunes of Sorl Auto Parts, Inc. (Nasdaq: SORL), China’s largest manufacturer of commercial vehicle air brake systems, stand to follow. SORL manufactures, markets and distributes a comprehensive line of over 40 categories of air brake valves and components for commercial vehicles weighing over three tons, such as hand and foot brake valves, spring brake chambers, exhaust relay valves, air dryers and clutch servos (pressure boosters).

Since commercial vehicles' added weight means they take up to 40% farther than cars to stop, top-notch, braking systems are essential for truck and bus safety. With a strong reputation for using state-of-the-art technology to develop and build the highest quality and most advanced air brake systems in China, SORL is routinely awarded the "Top Supplier" designation for air brake systems by its major customers.

The only company in China that specializes in air brake valve systems exclusively, SORL has superior brand recognition and an extensive national distribution network that gives it a decisive advantage over its competitors, allowing the company to control the lion's share of a highly fragmented domestic market.

SORL has acquired vast experience in its specialty niche and forged solid relationships with China's 29 major automotive original equipment manufacturers (OEM), including Beiqi Foton, China's largest light truck manufacturer. The company also has a strong brand presence in the auto parts aftermarket, with exclusive contracts with close to 30 authorized distributors who only sell SORL-branded parts through over 800 sub-distributors nationwide.

In the third quarter of last year, SORL formed a strategic partnership with Baotou North-Benz, signing a technology development agreement and long-term contract to supply the truck maker with air brake products. The deal gave SORL exclusive rights to conduct research on and develop new braking technology for North-Benz's complete line of trucks. SORL's management team predicts that it will outfit as between 40% and 50% of North Benz's heady-duty trucks by the end of this year. In all, the contracts are expected to contribute $2 million to SORL's bottom line in 2008. 

SORL also secured a contract to supply air brake systems to the municipal bus fleet in Beijing and it inked a deal to provide air brake parts for use on 2,400 public transportation buses in the city of Tianjin (about an hour outside the capital), as a part of the municipalities fleet expansion to meet increasing demand. The deals have given SORL control of 25% of the bus brake parts market in the two cities.

The company has also increasingly expanded its reach beyond China's borders, with the long-term goal of becoming a top-tier global auto parts brand. SORL’s ever-growing international presence includes sales centers in the United States, Australia, the United Arab Emirates and most recently, India. Currently, exports account for about 40% of SORL's total sales, and that number is sure to increase as SORL penetrates the global marketplace.

Specifically, a handful of overseas successes in 2007 are expected to impact 2008 revenues: it signed a product sales agreement with an unnamed major OEM in India. Under the contract, SORL will supply air brake systems including hand brake valves, four circuit protection valves, relay valve and spring brake chambers for the OEM's trucks. The financial terms of the deal were not disclosed; it signed a new one-year sales agreement with TATA Motors Limited (NYSE: TTM), an Indian auto company that makes trucks, SUVs and the world’s cheapest passenger car; SORL entered into a supply contract with a major South African tractor-trailer maker; and it established a relationship with a major American auto parts distributor for aftermarket brake valve components and other products. The company expects these international deals to generate about $5 million in revenue this year.

According to the China Association of Automobile Manufacturers, the Chinese commercial market will maintain double-digit sales growth in 2008, thanks to high demand for domestic construction in preparation for the 2008 Olympics and increasing logistic and travel needs tied to the country's economic growth. To help meet the needs of this growing demand, SORL plunked down $20 million in October 2007 for large a commercial property in Whenzhou it had been leasing and sharing with another auto parts business, to dedicate the entire facility to ramping up production capacity.

With a solid business model, smart management team, superior products, agile R&D, established partnerships, savvy marketing machine, and effective pricing and cost controls, the brake parts maker is pulling out all the stops to continue down the road to success. And while there has been little upside reaction to SORL to date, the company's shrewd business moves and solid growth trend (37% compounded annual growth over the past three years) make this microcap a growth play whose upside potential cannot be ignored.

Shares closed at $5.90 on Wednesday. The 52-week range has been between $5.70 and $9.46. Analysts' one-year price target is set at $12.

About the Author
Shannon Roxborough previously worked as a global risk analyst, and lived in China for nearly two years. Read More

Rate This Article:
(click a star)

Enter comment:

 Free registration required