China Automotive Systems (NASDAQ: CAAS)

When your customer's name is BYD, you grow revenue by 19% YoY and have a P/E below 7

Disclaimer:

Please conduct your own thorough research. As the author of this post, I have a stake in China Automotive Systems Inc. (Nasdaq: CAAS) and own shares in the company. The following content is intended solely for entertainment purposes and should not be construed as financial advice.

Why China Automotive Systems?

Here's why I believe this stock is poised for growth in the near future:

• Revenue growth: +19.4% YoY, Annualized P/E < 7

• Leading car brands as customers: BYD, Stellantis, Mahindra & Mahindra, Chery

• Diversified revenue streams, Strong balance sheet

• Healthy dividend payout

• High insider ownership ( >67%)

What Does the Company Do?

China Automotive Systems, Inc. specializes in the design, manufacture, and sale of automotive systems and components. Its operations include the production of power steering gears, rack and pinion systems, and complete steering assemblies. With a vertically integrated business model, the company not only produces critical components for both domestic and international automotive OEMs but also provides after-sales services and R&D support through its various subsidiaries—spanning entities in China, North America, and Brazil.

Bullish Reasons

In the following section, I will outline the key bullish factors that support my conviction that China Automotive Systems is currently undervalued:

Strategic Relationships with Leading Automotive Brands

With key customers accounting for a substantial portion of net product sales—some exceeding 10% individually—the company's strong relationships with both domestic and international automakers generate a steady revenue stream.

For example, BYD Auto Co., Ltd. is identified as one of the Company's key customers, accounting for 6.4% of its total revenue in 2023. The company is one of the top five customers for China Automotive. Stellantis N.V. is a key overseas customer of the company, and has been supplied with power steering gear since 2009, accounting for 17.2% of the company's total sales in 2023. Ford Motor Company is another overseas customer, having been supplied with power steering gear since 2016.

Diversified Revenue Streams and Multiple Growth Engines

Operating across 15 product sectors, the company’s revenue is diversified among key segments such as power steering (Henglong, Jiulong, Wuhu), electronic steering systems (Henglong KYB, Hubei Henglong), and other related automotive components. This diversified model mitigates risk and offers multiple avenues for future earnings growth.

Strong Balance Sheet & Solid Liquidity

It's important to evaluate all figures in the context of the current market capitalization of US$124 million.

As of September 30, 2024, the company reported total cash and cash equivalents, and pledged cash of $138.8 million. Total accounts receivable, including notes receivable, amounted to $314.2 million, while accounts payable, including notes payable, stood at $271.8 million. Coupled with low levels of bank loans and well-managed working capital—including significant accounts receivable and inventory—the financial foundation is exceptionally strong. This liquidity not only supports day-to-day operations but also positions the company for strategic investments and potential acquisitions.

The numbers look good

China Automotive Systems reported Q3 2024 revenue of $164.2M, reflecting a 19.4% YoY increase from $137.5M in Q3 2023. Net income for the quarter declined to $5.5M from $9.5M a year earlier, mainly due to higher income tax expenses. With a market cap of $124 million and nine-month EPS of $0.69, the company's annualized P/E ratio is approximately 6.7, suggesting a relatively low valuation compared to industry peers.

Special Dividend Initiative Signaling Confidence

To commemorate its 20th anniversary of Nasdaq listing, the Board of Directors declared a special cash dividend of US$0.80 per share on July 19, 2024. With an aggregate dividend payment of approximately US$24.1 million already underway, this initiative reflects management’s confidence in the company’s robust cash flows and overall financial health.

Valuation

The current stock price is: $4.11 (February 6, 2025)

Below are my assessments of the fair stock price in three distinct growth scenarios:

Margin of Safety

My Margin of Safety Stock Price is: $4.01

Normal case

I expect the following stock price in a normal growth scenario: $6.10

Best case

My best case scenario calculation gives the following stock price: >$10.82