Commercial Vehicle sales in China in March reached their highest level in over 1 year and 1Q16 sales were 1.2% higher than last year. Truck sales rose while busses declined. The outlook for truck demand has improved due to strong government led infrastructure investment and an emerging rebound in residential construction.
The US listed auto suppliers have varying exposure to these segments:
- CXDC: China XD Plastics makes modified plastic compounds tailored to satisfy customer requirements for flexibility/rigidity, strength, and resistance to heat/cold and corrosion. In many applications plastic parts can replace metal components at lower cost and lighter weight. Penetration of larger commercial vehicles is limited due to greater strength requirements. The company has a long-term goal of expanding sales to railways, aircraft, medical devices, and 3-D printing. Rising demand for Electric/Hybrid vehicles is favorable for CXDC as these use more plastic parts than traditional models. Auto parts makers see potential for global plastics used per vehicle to double over the next 10 years (LINK)
- SORL: SORL Auto Parts (English site – Chinese site) is a leading domestic producer of braking systems. The company received a buyout offer from its Chairman at a very low valuation of $2.84/share, but he opted not to proceed due to “volatile market conditions“. This process undermined trust in management because it gives the impression that public investors may never have an opportunity to realize the fair value of their shares.
- ZX: China Zenix Auto is the country’s leading producer of commercial vehicle wheel rims. The company made a considerable investment in a new facility capable of producing forged aluminum wheels. Alcoa estimates that such wheels will eventually capture 50% of the international market due to their lower maintenance cost and the fuel savings created by their lower weight. Zenix disclosed during its 3Q conference call that the aluminum wheel facility has achieved a production capacity of 180000 wheels/year and the company gave guidance for 2016 sales of 100000 wheels. This is a major corporate milestone that should lead to improved operating results in 2016. Diesel exhaust from commercial vehicles is one of the largest factors in China’s smog problem and the government currently provides significant incentives for “new energy” vehicles incorporating a full range of energy efficient components (including aluminum wheels).
- CAAS: China Automotive Systems is the country’s leading producer of steering systems. Most of the company’s operating subsidiaries were developed as joint ventures with major auto companies ensuring close corporate relationships. The company also has a strong supplier relationship with Chrysler North America. The recent announcement of a share buyback plan appears well-timed with a rebound of the passenger vehicle market not fairly reflected in the current share price.
- CYD: China Yuchai International is a leading domestic producer of diesel engines (primarily for commercial vehicles) and has an emerging product line of natural gas-powered engines. The company deserves credit for the high quality of its investor communications and its consistently high dividend payouts.
CXDC and CAAS are the main beneficiaries of the renewed strength in the passenger market while ZX SORL and CYD are reliant on the commercial vehicle market. If truck sales continue the gains shown in the first quarter then these companies should see improved results in 2016. CXDC and ZX are indirect beneficiaries of government incentives for “New Energy” electric vehicles.