By Covering Business March 15, 2012
By Nathalie Pierrepont
Columbia Journalism School ‘12
Investors looking to pin their hopes on any one nation would be hard-pressed to find a better candidate than China, which has grown wildly over the last few years.
Although the Chinese government recently lowered its annual growth forecast to 7.5% from 8.0%, the new rate would far outpace projected economic growth in the U.S. and Europe.
Those in search of a particularly big pop might take a risk on Chinese small-cap stock with some price momentum and earnings growth.
AsiaInfo-Linkage, which provides telecom software solutions and IT security in China, has a market cap of $916 million, and its shares have climbed 61 percent in the last 13 weeks. However, the company received an offer to go private in January, suggesting a need for debt restructuring. AsiaInfo’s share price will certainly spike if it accepts the privatization proposal, but that timing is difficult to predict.
Another candidate is China Automotive Systems, a small manufacturer and distributor of power steering systems and related products in China. The company has exposure to China’s rapid growth, but it also does business with Brazil and the U.S., where auto demand is rebounding.
Car sales in China fell 18 percent and production decreased 23 percent between December and January, according to the China Association of Automobile Manufacturers. However, shares of China Automotive Systems have climbed by more than 60 percent in the last 13 weeks.
CAAS’s earnings per share have grown by nearly 50 percent over the past five years. The gains have been driven by the company’s ability to leverage government support and establish partnerships with leading auto companies throughout the world.
For the last decade, China’s government has supported the automotive industry. In fact, China’s central and 24 provincial governments now consider autos a “pillar industry,” according to a Trade and Globalization report released by the Economic Policy Institute in January 2012. The Chinese auto-parts industry, in particular, has received about $27.5 billion in subsidies since 2001 and already has pledged at least $10.9 billion more over the next decade.
As a result, China’s auto-parts companies have gained a substantial competitive advantage in the global market. Chinese auto-parts exports increased more than 900 percent from 2000 to 2010, according to the EPI report. In 2010, the U.S. auto-parts trade deficit with China reached almost 30 percent of the total U.S. auto-parts trade deficit, according to the EPI.
In April 2009, two of CAAS’s subsidiaries were granted a preferential income tax rate through 2011. During the first nine months of 2010, the company received $266,379 in government subsidies. With the support of the government, CAAS was able to achieve record sales in 2010 and engage in partnerships abroad.
In 2009, U.S.-based Chrysler began using parts from CAAS in its Jeep Wranglers. In 2011, Global OEM, an international manufacturing organization based in the U.S., chose CAAS as a supplier of power steering gears in a SUV model sold exclusively in North America. Most recently, the company formed a joint venture in Brazil to target the largest automotive market in South America and created a new manufacturing facility in China to increase its production of power steering units for commercial vehicles such as heavy-duty trucks.
Stimulus from the China’s local and central governments have propped up the country’s auto-parts industry over the past decade, but when the purchasing incentives expired and the government shifted its focus toward anti-inflationary economic policies in 2011, CAAS was able to maintain its momentum because of its strong fundamentals. With only 3,000 employees, a healthy cash position, and a market capitalization of $169 million, CAAS has plenty of room to grow. Additionally, unlike many state-assisted enterprises, 71 percent of CAAS is owned by management. This suggests that the company may be pushed to grow more aggressively, efficiently and profitably than larger companies in the sector.
This article was written for the Columbia Journalism School’s seminar on business journalism in the spring of 2012.
