China Auto Electronics (T42.SG)

One of my reader has requested me to comment on China Auto Electronics (T42.SG).

Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities. Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Background:

The Company was formerly known as Snowcity International Holdings Limited and changed its name to China Transcom Technologies Limited in 2005. The Company changed its name from China Transcom Technologies Limited to China Auto Electronics Group Limited on 3 October 2007 following the completion of the merger with Tianhai Electric (Group) Corporation.

The Group previously is primarily engaged in the design and manufacture of a wide range of telecommunication, data network and transportation communication products in the PRC. The Tianhai Group designs, assembles, and manufactures wire harnesses, connectors, moulds, crimping machines, and electronic modules for the automobile industry. After the merger, the Company decides to focus fully on its core automobile parts and divest from the telecommunication business.

Pros:

1. The Company has a very high market share of 10% as a provider of wire harness to the automobile industry in China. Believed to be the top 4 in China.

2. The PRC automobile industry has been identified as a growth pillar. The Chinese government intends to push China as an viable player in the global automobile sector by 2010, and is willing to provide grants to boost efficiency and product improvements.

3. There are high barriers to entry to the automobile industry, as the qualification period for a component supplier to a automobile manufacturer can take up to three years. Being qualified to supply to 18 China automakers, it has many advantages to the rest of the players in the fragmented wire harness industry.

4. Interesting business model: Wire harness only makes up to two percent of the total car manufacturing cost, but being a critical component, automakers have to purchase them for every production. And once the automaker makes use of these customised wire harness for a particular model, it will be not practical to switch to other wire harness as it might run into design complications. Such recurring profit is a plus.

5. Net margin of 15% based on FY07 9M.

Cons:

1. Dependent on a few major customers, more than 50% of revenue came from 3 key customers. If any of these customers suffer a slowdown or switch suppliers, it will have a major adverse impact.

2. RMB appreciating and USD falling. This will have an impact on its bottomline since 20% or more of revenue was from export sales, which is in USD.

3. No track history as a public listed company for its core automobile business. I will try to avoid such companies as running a public listed firm is different from a private-held one, so will rather wait for management to prove its capability.

4. Unable to find out any future plans of this company, any readers care to share?

Actually, I received the coverage request on 7-Jan-2008 and the stock was trading at $0.595. In just a week's difference, it is now trading at $0.295, a 50% drop. It seems that the sharp fall was due to a price downgrade by DBSV.

Although there are many good points listed above, but I am still skeptical on the track history of this company. I suggest we continue to observe the company's results for the next few quarters before vesting into it. Nevertheless, for those investors who have been tracking this company for some time, perhaps you all feel that it is really a good time to enter. At the end of the day, you have to make your own decision. Remember, nobody cares as much as YOU on your own money.