Is China Automotive Systems a Buy? China Automotive (CAAS) saw its share price surge substantially over the past year thanks to optimism surrounding China's growing electric vehicle market and the company's technological and product advancement. However, as a new wave of competitors threatens its market share, what are the company's prospects? Read more to find out.

Headquartered in Jingzhou City, China, China Automotive Systems, Inc. (CAAS) is a manufacturer and seller of power steering gears, electronic and hydraulic power steering systems and other components. Its shares have rallied 145.7% over the past year, driven by increased sales of electric vehicles in China and investor optimism surrounding the Chinese government's electric vehicle (EV) target of 20% of all new cars by 2025.

However, CAAS' stock has declined 14.7% over the past month and 31.9% year-to-date. Also, its stock is trading 68.9% below its 52-week high, indicating short-term bearishness. This is attributable primarily to a decline in passenger vehicle sales and increased expenses in the last reported quarter.

While the company's strategic investments in the Chinese EV space could benefit the stock in the long run, the intensifying competition in the EV space could be a big headwind.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here is what we think could influence CAAS' performance in the coming months:

Competitive EV Landscape in China

Backed by government support, many auto part manufacturers are entering an already crowded Chinese EV sector . Indeed, smartphone makers Xiaomi and Huawei Technologies also recently confirmed that they are making a foray into the EV space. The stream of new entrants is putting immense pressure on the existing players. With new EV component manufacturers making headway in key international markets, the market share for companies like CAAS could erode over time.

Advancement in EPS technology

In March, CAAS introduced a new Electric Power Steering (EPS) product to fulfill key Advanced Driver Assistance Systems (ADAS) functionalities. Based upon the proprietary technologies developed by its R&D team, the EPS will enable drivers to adapt to different road conditions and improve user experiences. CAAS has already commenced mass production of the new EPS for vehicle models of Great Wall Motors, a leading Chinese automaker. With additional purchase orders from JAC, Chery Auto and Fiat Chrysler Automobiles, the company should benefit significantly.

Mixed Financials and Profitability

CAAS' net sales increased 26.4% year-over-year to $146.5 million in the fourth quarter, ended December 31, 2020. Its gross profit rose 35.7% from its year-ago value to $22.8 million. However, the company reported a $3.2 million net loss, compared to $1.7 million in net income in the prior-year quarter. Also, its loss per share came in at $0.10 for this period. CAAS' selling expenses increased 47.4% year-over-year to $5.6 million, while its general and administrative expenses increased 120% from the year-ago value to $14.3 million.

The company's 13% trailing-12-month gross profit margin is 61.5% lower than the industry 33.7% average. Its EBITDA margin and asset turnover ratios of 3.4% and 0.6%, respectively, are 65.7% and 35% lower than t industry averages. Moreover, its ROE and ROA came in at negative 1.7% and 0.7%, respectively. However, its 10.2% levered free cash flow margin is 36% higher than the 7.5% industry average.

Consensus Price Target Indicates Potential Upside

Currently trading at $4.25, Wall Street analysts expect the stock to hit $5 in the near term, indicating a 17.6% potential upside.

POWR Ratings Reflect Uncertainty

CAAS has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. CAAS has a C grade for Quality. This justifies the stock's mixed profitability. It also has a C grade for Growth. CAAS' mixed financials are in sync with the grade.

However, the company has a B Momentum grade, which is reflective of its price returns over the past year.

In addition to the grades we've highlighted, one can check out additional CAAS ratings for Sentiment, Stability and Value here. CAAS is ranked #19 of 78 stocks in the D-rated China group.

Click here to view the top-rated stocks in the China group.

Bottom Line

Shares of CAAS have gained 37.1% over the past six months. The burgeoning market for Chinese electric vehicles and the company's investment in new product development have been the main drivers of this performance. However, its mixed financials and profitability in an intensely competitive EV space could be a cause of concern. So, we think investors should wait for better entry points before investing in the stock.

Click here to checkout our Electric Vehicle Industry Report for 2021

CAAS shares were unchanged in premarket trading Friday. Year-to-date, CAAS has declined -31.89%, versus a 12.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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