Wednesday, July 30, 2008
Thoughts on Auto Suppliers
I've bought and sold some auto makers for a few times over the last few years without much success. I don't know the reason why but I was never quite able to catch the price movement. Since I never treated those as investment, I wasn't particularly concerned. My limited experience in Canada taught me that most, maybe except Toyota, auto makers do not seem to enjoy prolonged success as the industry is too cyclical and worse competitive. At one time Chrysler was the favorite as it invented the minivan, then it was Ford with the SUV, but now it was Toyota with the hybrid. Anyone guess who tomolo's winner is?
Having said this, the China growing middle class story continues to attract me and I wonder whether in China the auto market will be different. But there's are even more automakers there who share with me the same inspiration, and this pretty much balances the odd, i.e. greater competition in a greater market. So instead I opted for autopart suppliers who may present some value.
Minth (425)
A body part builder which supplies mostly to Japanese brand automakers in China. 85% of sales last year was local so it should be least affected by the slowdown in overseas market. As Japanese brands are usually more energy efficient and have better quality than competitors, Minth's order book should have more stability. Minth's products also seem to be of higher grade, judging from its ability to serve Japanese automakers and to obtain various grant from the local government to support it R&D (~3.5% of sales). However it's hard not to ignore the effect of the rising gasoline prices which will, if liberated eventually, dampen overall auto demand.
Profit has been growing nicely in over 30% over the last 3 years, in RMB which means even higher growth in HKD. Of course a large part of it was due to the growth in the China auto market and the aggressive expansion plan of automakers. Net margin was about 20% but the tax rate was very low at single digit, due to the preferential treatment which will phase out in a few years. ROE has been around 20%. Financial position is very good as Minth raised 1.5b from the market timely last July when the share price was over $12 (vs $5 now). NAV was 3b and net cash including FX products was 1.4b which was a lot!
Orders should be in RMB but somehow Minth had considerable exchange loss last year (50m compared to profit of 360m). It appeared Minth had been tempering too much with FX products. It had 600m invested in funny named instrument like range accrual and basket note that did not appear to be of much business value other than earning interest. Probably Minth didn't really have plans for the huge placement proceeds and felt compelled to do something about it. Distributing the extra cash makes better sense as dividend yield is absurdly low at 2.35% even at today's price.
At current price of $5 Minth appears fairly priced at a p/e of about 13x (if adjusted for a higher tax rate), for a bigger discount is needed to compensate for the uncertainty in the auto market and its treasury management. I quite liked Minth actually but since there's plenty of alternatives to choose from these days, the standard has to be set higher.
Norstar (2339)
It is the opposite of Minth which supplies brakes and suspension system to mostly overseas markets, biggest of which is US aftermarket. There's about 20% sales to Europe and local sales was only 15%. So it's safe to say it pretty much covers all major disaster zone. While secondary demand should sustain even in a downturn, afterall one can't really drive with faulty brakes, the US and Europe markets do look shaky at the moment. Norstar is trying hard to develop the China market but that will take some years before profit contribution becomes meaningful.
Norstar is already feeling the heat like other export-oriented industrials. Its margin and profit growth was eaten up by rising RMB and production costs. It also shares similar downside risk as Minth, too little tax paid but too much tempering with fx products. Norstar even has exposure to JPY/NZD rate which looks like a carried trade to me. In fact, much of earnings growth last year came from these structured products and year end invested sum could be as much as 1.1b. The company's huge pile of cash also looks a bit strange to me, and it had been holding over 1.4b net cash in the beginning of last year, yet it raised another 1b of syndicated loan during the year, but year end capital commitment was only 150m. Bear in mind NAV was 3.3b so about half was in cash (and possibly fx products). And it's hard to feel comfortable when Norstar didn't tell exactly how much it's invested in what. There's some description but in scant details and I'm not counting on the sensitivity analysis provided by management either. Norstar may turn out to be an excellent fx trader, but that's not why I was attracted to this company in the 1st place.
Even Norstar is traded very cheaply as the whole company is valued at only 1.7b, when last year's recurring earning was about 500m, there's probably good reason for this.
Looks like I'm not ready for the auto sector yet.
DISCLOSURE: I don't hold 425 nor 2339 at time of writing.
Having said this, the China growing middle class story continues to attract me and I wonder whether in China the auto market will be different. But there's are even more automakers there who share with me the same inspiration, and this pretty much balances the odd, i.e. greater competition in a greater market. So instead I opted for autopart suppliers who may present some value.
Minth (425)
A body part builder which supplies mostly to Japanese brand automakers in China. 85% of sales last year was local so it should be least affected by the slowdown in overseas market. As Japanese brands are usually more energy efficient and have better quality than competitors, Minth's order book should have more stability. Minth's products also seem to be of higher grade, judging from its ability to serve Japanese automakers and to obtain various grant from the local government to support it R&D (~3.5% of sales). However it's hard not to ignore the effect of the rising gasoline prices which will, if liberated eventually, dampen overall auto demand.
Profit has been growing nicely in over 30% over the last 3 years, in RMB which means even higher growth in HKD. Of course a large part of it was due to the growth in the China auto market and the aggressive expansion plan of automakers. Net margin was about 20% but the tax rate was very low at single digit, due to the preferential treatment which will phase out in a few years. ROE has been around 20%. Financial position is very good as Minth raised 1.5b from the market timely last July when the share price was over $12 (vs $5 now). NAV was 3b and net cash including FX products was 1.4b which was a lot!
Orders should be in RMB but somehow Minth had considerable exchange loss last year (50m compared to profit of 360m). It appeared Minth had been tempering too much with FX products. It had 600m invested in funny named instrument like range accrual and basket note that did not appear to be of much business value other than earning interest. Probably Minth didn't really have plans for the huge placement proceeds and felt compelled to do something about it. Distributing the extra cash makes better sense as dividend yield is absurdly low at 2.35% even at today's price.
At current price of $5 Minth appears fairly priced at a p/e of about 13x (if adjusted for a higher tax rate), for a bigger discount is needed to compensate for the uncertainty in the auto market and its treasury management. I quite liked Minth actually but since there's plenty of alternatives to choose from these days, the standard has to be set higher.
Norstar (2339)
It is the opposite of Minth which supplies brakes and suspension system to mostly overseas markets, biggest of which is US aftermarket. There's about 20% sales to Europe and local sales was only 15%. So it's safe to say it pretty much covers all major disaster zone. While secondary demand should sustain even in a downturn, afterall one can't really drive with faulty brakes, the US and Europe markets do look shaky at the moment. Norstar is trying hard to develop the China market but that will take some years before profit contribution becomes meaningful.
Norstar is already feeling the heat like other export-oriented industrials. Its margin and profit growth was eaten up by rising RMB and production costs. It also shares similar downside risk as Minth, too little tax paid but too much tempering with fx products. Norstar even has exposure to JPY/NZD rate which looks like a carried trade to me. In fact, much of earnings growth last year came from these structured products and year end invested sum could be as much as 1.1b. The company's huge pile of cash also looks a bit strange to me, and it had been holding over 1.4b net cash in the beginning of last year, yet it raised another 1b of syndicated loan during the year, but year end capital commitment was only 150m. Bear in mind NAV was 3.3b so about half was in cash (and possibly fx products). And it's hard to feel comfortable when Norstar didn't tell exactly how much it's invested in what. There's some description but in scant details and I'm not counting on the sensitivity analysis provided by management either. Norstar may turn out to be an excellent fx trader, but that's not why I was attracted to this company in the 1st place.
Even Norstar is traded very cheaply as the whole company is valued at only 1.7b, when last year's recurring earning was about 500m, there's probably good reason for this.
Looks like I'm not ready for the auto sector yet.
DISCLOSURE: I don't hold 425 nor 2339 at time of writing.
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