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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Risk-Reward With SORL Auto Parts

With the company releasing earnings in a few days, is it a buy?

March 27, 2018 | About:

SORL Auto Parts Inc. (NASDAQ:SORL) is a commercial vehicle brake systems manufacturer based in China. The company generates most of its revenue (78.2%) from its domestic customers.

I’ve run some of the same screens for the past 10 years and for a number of years now, this company has continued to be on my radar. The stock has bounced all over the place, but the financials paint a very interesting picture. With new tariff fees being placed on China, I wanted to find a Chinese company that sold into their own market. Five years ago, it was just under $3 a share. Now with the stock above $6.50, but down from its 2017 high $8.80, I wanted to take a deeper dive.


I think that all Chinese stocks are being undervalued by the government’s currency manipulation, and it is only a matter of time before the yuan trades on par with the dollar. If that ever happens, every Chinese company will see a massive rise in its financial performance, at least on paper, which would result in explosive short-term stock price movements -- mainly to the upside.

Any time I look at foreign companies that don’t have products here in the U.S., my first thought is, “Is this company fake?” Chinese stocks listed here in the states have received a lot of negative attention as fraudulent shell companies and lower accounting standards spread, but I can’t tell if that’s the case with SORL.

First, there aren’t any big short-sellers like Muddy Waters Research, but the big names on the buy side like Susquehanna, Oz and Gabelli, only own small portions of the stock.

Second, the company continues to produce solid financial results. It has market cap of $123 million, book value of $8.69 and produced $30 million in net profit on $347 million in revenue over the last 12 months. Those results would normally scream "major buying opportunity."

What’s more is that this growth doesn’t seem out of line with the sector. Yes, sales are up 134% in the last decade, but earnings per share and book growth are in step with the automotive market as a whole.

Let’s assume it’s the real deal. Then what?

The entire auto industry is changing thanks to Tesla and Uber. Marginally more cars will be on the road in 10 years than there are now. However, brakes will continue to be sold, wear out and sold again for all autos. For commercial vehicles, where volume will likely increase faster than in consumer autos, this means SORL Auto Parts will have a market for its products well into the future.

Some may point to the financials and mention the receivables growing faster than the company’s revenue. In manufacturing, not everyone can be like Coca-Cola. Big equipment makers like Caterpillar often have higher A/R than revenue because of purchase orders, but that’s not a bad thing. While SORL Auto Parts has over $80 million in debt, over 65% of its market cap, as long as the positive earnings continue, there’s a large margin of safety attached.

I think the stock is worth a flyer.

Disclosure: I am not long/short any stocks mentioned in this article but may initiate a long on SORL Auto Parts in the next 72 hours.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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