China Tracker - Details for Wonder Auto Technology (WATG)

 Wonder Auto Technology
 Analyst Coverage
2011-08-15Brean MurrayDowngradeHoldn/a
2011-05-17Maxim GroupDowngradeHoldn/a
2011-05-02Rodman & RenshawDowngradeTerminatedn/a
 

Effective immediately, we are terminating coverage on Wonder Auto Technology Inc. to better allocate resources within our coverage universe. Our last rating for WATG was Under Review / Speculative Risk. Investors should not rely on our previously published financial projections.

2011-04-18Roth CapitalReiterationBuy$11.00
2011-04-08Piper JaffrayReiterationOverweight$11.50
2011-03-02OppenheimerDowngradePerformn/a
2011-03-02Rodman & RenshawDowngradeUnder Reviewn/a
 

We are putting our rating on WATG under review from a Market Outperform rating previously. This rating change is due to the announced re-statements. In line with this we are removing our financial projections for the company. The company intends to have PricewaterhouseCoopers Zhong Tian CPAs Limited Company re-audit its financial statements for FY08 to FY09. We are uncertain as to whether the company will be able to file its upcoming 10K and 10Q on a timely basis given this development. We will revisit our financial projections and rating once management finishes the re-auditing process and files its 10-K/10-Q forms with SEC.

2011-03-02Roth CapitalReiterationBuy$11.00
 

We maintain our BUY rating and $11 target on shares of WATG. We consider the financial restatements as benign and view any weakness associated with the delayed filing of its 2010 Form 10-K as a buying opportunity. Once completed, we believe Big-Four-audited financial statements will alleviate investor skepticism and enable multiple expansion.

2011-03-02Global HunterReiterationBuy$14.00
 

Wonder Auto Technology (WATG) announced yesterday after the market close that it is expected to restate its 2008 and 2009 financial statements and is evaluating the impact on its quarterly statements for the first three quarters of 2010. We believe the restatements should have only minor impact on the financials in the last three years. The restatements were due to a cutoff error in the timing of revenue recognition. So far the net effect is expected to be an increase in revenue and net income in 2008 and 2009. We expect only a minimal impact on 2010. The company still expects to meet its previously provided revenue and profit guidance for 2010. Due to the restatement, we expect a slight delay in the filing of its 2010 10K, which we expect to be released at the end of March or first half of April. We expect Q4 and FY10 results to exceed the company's guidance and our previous estimates. We increased our 2010 estimates and maintained 2011-2012 estimates. Shares are trading at 4.5x our FY11 EPS. We reiterate our Buy rating and $14 price target, which is 10.4x our FY11 EPS.

2011-03-02Piper JaffrayReiterationOverweight$11.50
2011-02-22Roth CapitalReiterationBuy$11.00
 

Reiterating BUY rating following China's record high monthly auto sales in January, which eases market concerns. Alternative financing may also keep interest expense under control. WATG shares are oversold, in our view, and poised for a recovery.

WATG trades for 5.4x our 2011 non-GAAP EPS of $1.26, a deep discount to peers and below its book value of $7 per share. Our sensitivity analysis indicates that, even in a bear-case scenario, WATG can generate $1.00 in EPS in 2011, implying a 6.8x P/E. We believe our model has already reflected a softened industry outlook and rising costs, and the downside risks have been priced in. We maintain our Buy and $11 PT, which is based on 9x FY11 EPS.

2011-01-10Brean MurrayReiterationBuy$14.00
2011-01-03Piper JaffrayReiterationOverweight$11.50
2010-12-29Roth CapitalReiterationBuy$11.00
 

2011 China auto sales growth may slow to 10%. The ~30% yoy growth of China's auto market in 2010 is not sustainable next year due to a number of policy changes including: (1) Expiration of stimulus policies; (2) Volume restrictions in big cities to ease traffic congestion; (3) Rising vehicle operating costs and a potential hikes in vehicle/vessel usage taxes.

Small cars consumption likely to be impacted the most. After two years of strong auto sales growth and increasing traffic congestion in China's largest cities, the government's position regarding auto sales has shifted from "strong support" to "neutral", in our view. Rising gasoline prices, tax hikes and potential traffic controls will result in higher operating costs for owners. Small car sales are likely to be hit the hardest as these buyers are more sensitive to rising costs. We note WATG's alternator/starter and airbag businesses (~74% of our estimated FY11 revenue) are likely to be negatively affected.

Mid-to-large car sales may outperform in 2011. We believe mid-to-large size car sales are likely to outpace industry-average growth in 2011, which should result in a higher ASPs and enhanced margins for alternators and starters, partially offsetting sales pressure.

Interest rate hikes add pressure. To combat inflation (Nov CPI at 5.1%), China raised interest rates twice in Q4 (by 50 bps), and the one-year benchmark lending rate has reached 5.81%. Further rate hikes in 1H11 are anticipated. Assuming WATG's ~$200M debt balance (including $58M scheduled borrowing next March for the Jinheng acquisition), a 100bps rate increase will impact EPS by nearly $0.05.

Lowering est and PT, maintain BUY on valuation. Most auto-related names (whether listed in the U.S., Hong Kong or China) have seen pressure, following the traffic control measures announced by Beijing's municipal government. With a dimmed industry outlook, we are lowering 2011 EPS to $1.26 (from $1.32) on lower revenue and increased finance costs. Considering a much weaker market sentiment and higher leverage, we are lowering our PT to $11 (from $14), based on 9x our FY11 earnings estimate.

2010-12-20Roth CapitalReiterationBuy$14.00
 

Wonder Auto announced today a proposed plan to list its subsidiary – Jinzhou Halla Electrical Equipment on China's Shenzhen Stock Exchange (SZSE). Jinzhou Halla, consisting of the alternators/starters and engine valves and tappets businesses (operated under Jinan Worldwide), will issue new shares under the planned IPO, and WATG's shareholders will own more than 73% of Halla. Management expects Halla and Jinan Worldwide to account for 50%-60% of projected 2010 net income. We expect revenue of the combined business segments to comprise ~62% of 2011E revenue.

Benefits to WATG shareholders: 1) Lower cost of capital. Based on our projected profit and trading multiples for A-share peers (~30x 2011 earnings), Jinzhou Halla should be able to raise $200M with only 14% dilution, providing a much cheaper financing alternative. 2) Support valuation of WATG in the U.S. A Shenzhen-listed Halla may have a higher market value than its U.S.-listed parent. 3) Improving balance sheet. WATG carried $139M debt as of Q3 and is likely to reach $200M after the final payment to Jinheng acquisition. A $200M equity financing should substantially improve the firm's debt/equity ratio and allows further business expansion. 4) Demonstrate company's legitimacy. The listing entity's legal structure is generally more stringent in China's domestic stock market than in the US. A clearance through China Securities Regulatory Commission should support the legitimacy of WATG's corporate structure, which has been a subject of short-seller attack.

No assurance of success. We believe the corporate restructuring and listing process should take at least a year. We also note that such an initiative is unprecedented thus far for an overseas-listed Chinese company. Currently, only the largest SOEs are allowed to list both inside and outside China.

Maintain BUY. With or without the success of an A-share listing, we believe WATG shares are undervalued (trading for only 6x 2011 earnings). Our earnings estimates have reflected our projection of a slower auto market in China. WATG shares trade for 6x our estimated FY11 earnings, well below both US peers (14.4x) and Chinese peers (10.2x). We continue to apply an 11x multiple to our estimated FY11 earnings of $1.32, and maintain price target at $14.

2010-12-07OppenheimerReiterationOutperform$14.00
2010-12-06Piper JaffrayReiterationOverweight$15.00
2010-11-10Brean MurrayReiterationBuy$14.00
 

Mixed results in 3Q10. WATG reported mixed results in 3Q10 with revenue beating consensus by $5 million and non GAAP EPS beating consensus by 14 cents. However, WATG benefited from a one-time investment gain of $5.3 million in the quarter. Excluding the larger-than-expected one-time gain on investment, non GAAP EPS was actually two cents shy of our expectation.

Raising annual guidance, yet implied 4Q net income is below expectations. WATG raised its annual guidance to $307 million from $300 million and its net income to $37.5 million from $36 million (including share-based compensations). While the implied revenue is higher than our expectation, the implied non GAAP EPS in 4Q is below our expectation. The gap could be a result of 1) management being conservative; 2) the company's net income guidance included the sizable one-time investment gain.

Expecting higher financial expenses in the coming quarters; lowering estimates. Upon management's guidance, we raised our 4Q10 revenue forecast to $98.6 million (+57.9% YoY), but lowered our non GAAP EPS to $0.26 (+15.6% YoY), anticipating higher financial costs as a result of increasing professional service fees. Accordingly, we are fine tuning our 2011 revenue estimate to $456 million (+47.2% YoY), and lowering our non GAAP EPS to $1.37 (+21.5% YoY).

China auto industry continues to post good growth in October. The China Association of Automobile Manufacturers (CAAM) announced October auto data. Auto sales in October were 1,539K (+25.5% YoY, -1.16% MoM). While October auto sales fell slightly MoM due to the October National Holiday, it still showed solid growth of 26% YoY. Therefore, we continue to expect robust growth for the overall auto industry in 4Q10 and full-year 2010. Given the increasing visibility (total sales of 14.7 million in the first 10 months of the year), we beli eve the auto industry will deliver 17+ million in annual sales in 2010, implying 25%+ YoY growth.

Maintain Buy rating; lower target price. We continue to be positive on China auto sales growth in 4Q10 and in 2011 and positive on the business fundamentals of WATG. That said, we expect certain earnings volatility in the coming quarters given uncertainties on 1) the level of their financial expenses; 2) gross margin profile as WATG is integrating Jinzhou Jingheng, a lower margin business. As a result, we maintain our Buy rating on the stock but lower our target price to $14. Our target price of $14 represents 10x of our 2011 Non GAAP estimate of $1.37, implying 41% upside potential from the current level. In our view, the market sell-off yesterday created an attractive entry point, given WATG is currently trading below 8.0x its 2011 estimated earnings, a significant discount to its US and domestic auto part peers.

2010-11-09Roth CapitalReiterationBuy$14.00
 

WATG reported Q3 revenue of $78.8M, beating ROTH/consensus estimates of $71.5M/$73.8M on better-than-expected sales volume in China and a higher-than-expected contribution from Jinheng consolidation. Operating income was $10.6M vs. ROTH est. $9.0M. Reported non-GAAP EPS of $0.40 (excluding stock compensation) vs. ROTH/consensus estimates of $0.26 was lifted by higher revenue, improved gross margin (26.2% vs. est. 24.8%), a $5.3M onetime gain for Jinheng acquisition. Excluding the $5.3M gain and $0.4M fees associated with the transaction, non-GAAP EPS was in line with our forecast. We note G&A and finance expenses were higher than our model.

Updated FY10 guidance raises concerns over Q4. Management raised full year revenue guidance to $307M from $300M and non-GAAP net income guidance to $37.5M from $36.0M, suggesting a Q4 revenue guidance of $96.1M and non-GAAP net income of $8.2M (or $0.24 in EPS). Although the revenue guidance meets consensus, EPS guidance falls short of ROTH/consensus est of $0.33/$0.28, pressured by higher operating expenses. The weak guidance triggered today's selloff, in our view. We consider the implied 8.5% net margin in Q4 guidance too conservative and we believe a 10% margin achievable and sustainable.

China October auto sales remain strong. According to CAAM, China passenger vehicle sales in October reached 1.2M units, up 27.1% yoy, well above our Q4 organic growth projection of 7%, which gives us more confidence in our forecast. We remain optimistic on China's auto industry in general, given current inventory levels and favorable policies for small engine vehicles.

Updated model; Maintain BUY and PT of $14. We cut our Q4 non-GAAP EPS from $0.33 to $0.28, reflecting the conservative management guidance. We also raised our 2011/2012 revenue estimates from $435.5M/$513.7M to $449.3M/$517.2M on optimistic outlook for China's auto industry and larger contribution from Jinheng. Meantime, non-GAAP EPS for 2011/2012 were cut from$ 1.37/$1.66 to $1.32/$1.63 on lower gross margin and higher finance costs. We maintain our BUY rating and PT of $14 which is based on 11x our estimated FY11 earnings.

2010-11-09Rodman & RenshawReiterationOutperform$15.00
 

WATG reported 3Q10 revenue of $78.8 MM and US-GAAP net income of $11.9 MM, with GAAP EPS of $0.35. On a Non-GAAP basis, the adjusted net income and EPS are $13.6 MM and $0.40, respectively. This beat our estimates of $66.5 MM in revenue and $6.0 MM in GAAP net income and $7.6 MM in Non-GAAP earnings. Gross margin stood at 26.2%, higher than 23.7% in 3Q09 and 25.1% in 2Q10. This was primarily due to an increased portion of revenue contributed by heavy duty engine valve products relative to light duty engine valve products. The higher overall GM was also partially attributable to improved margins in rods and shafts.WATG ended this quarter with $60.6 MM in cash, $99.6 MM of accounts receivable, $82.6 MM of inventory, and total borrowing of $139.3 MM. DSO during the quarter was ~100.3 days, compared to 2Q10's 71.2 days and 3Q09's 107.0 days.

WATG's 3Q10 results included several one-time gains and expenses partly driven by acquisitions that took place in 3Q10. Some of these expenses and gains may continue to show up in 4Q10 results. Investors should view the company's performance from an operating perspective in the near term to avoid any confusion surrounding earnings. We believe management's execution abilities on integrating the recent acquisitions will have an impact on the company's performance over the next 12 months. In line with that, investors should also monitor the company's working capital requirements and ability to maintain margins. Given the strength in passenger and commercial vehicle sales in China currently, we would not be surprised if the top line guidance provided proves to be conservative. However, a multiple expansion will primarily be driven by margin stability and cash flow improvements.

4Q10 & FY11 Estimates: For 4Q10 we are expecting revenue and GAAP net income of $100.9 MM and $9.2 MM, with diluted EPS of $0.27. On a Non-GAAP basis, our net income and EPS projections are $10.8 MM and $0.31 per share. This implies full year estimates of $311.8 MM, $28.0 MM (GAAP), and $0.82 (GAAP). We are introducing FY11 estimates with revenue and GAAP net income of $419.6 MM, $39.1 MM, and $1.15, respectively based on US-GAAP.

Valuation: Currently WATG is trading at a P/E multiple of ~9.8x and ~7.4x to our FY10 and FY11 Non-GAAP earnings estimates. This multiple is below industry averages for similar players in the US and China. We believe WATG should be trading at industry averages given the growth opportunity associated with it. We are comfortable maintaining our $15 price target on WATG, which translates into P/E multiple of ~15x and ~11x to our estimates for FY10 and FY11. 

2010-11-05Global HunterReiterationBuy$14.00
2010-09-30Roth CapitalReiterationBuy$14.00
 

Investors have recently expressed concern over WATG's recent acquisition of Vital Glee, questioning predecessor Jinzhou Lide and speculating on a related-party transaction. Based on our previous visits to Wonder Auto Suspension, our knowledge of the history of Wonder Industrial Group and recent discussion with the CEO, CFO, and CSO, we believe this transaction is fair.

Jinzhou Lide is a recent spinoff (April 2010) from Wonder Auto Suspension System and represents the operating assets of the suspension parts business. The legacy Wonder Suspension becomes a property owner. WATG management has clearly stated that it did not own any shares of Jinzhou Lide or Wonder Suspension. The acquisition of Jinzhou Lide, which owns the trademark of "Wonder", finally allows Wonder Auto Tech (WATG) to use such trademark in China. Since Zeng had run Wonder Suspension for more than five years, we expect a very smooth integration.

2010-09-13Roth CapitalReiterationBuy$14.00
 

Updated model reflecting $0.16 accretion from Jinheng acquisition in FY10; Maintain BUY, raise PT to $14 (from $11). We raise FY10 revenue/EPS estimates from $260.2M/$0.90 to $300.5M/$1.06 and FY11 estimates from $306.2M/$1.08 to $435.5M/$1.37. We have also introduced estimates for FY12. Our new PT of $14 is based on 10x our estimated FY11 earnings, a ~60% discount to our projected growth rate of 26%.

2010-09-08OppenheimerReiterationOutperform$15.00
2010-09-08JefferiesReiterationBuy$15.00
2010-09-07Rodman & RenshawReiterationOutperform$15.00
 

For 3Q10 we are projecting revenue and net income (GAAP) of $66.5 MM and $6.0 MM, with diluted EPS of $0.17. On a Non-GAAP basis, our estimates for net income and EPS are $7.6 MM and $0.22. For full year FY10, we expect revenue and GAAP Net income to be $299.5 MM and $28.6 MM, with diluted EPS of $0.84. Non-GAAP net income and EPS are estimated to be $35.2 MM and $1.03, respectively. Currently WATG is trading at a P/E multiple of ~8.9x to our FY10 earnings estimates. This multiple is below industry averages for similar players in the US and China. We believe WATG should be trading at industry averages given the growth opportunity associated with it. We are comfortable maintaining our $15 price target on WATG, which translates into P/E multiple of ~16x to our estimates for FY10.

2010-08-10Maxim GroupReiterationBuy$14.00
2010-08-05Roth CapitalReiterationBuy$11.00
 

WATG shares currently trade for 9.6x our FY10 EPS estimate of $0.90, below its Chinese peers (12x) and well below International peers (16.4x). A highly accretive acquisition is likely to serve as a significant catalyst for WATG shares. We recommend investors accumulate WATG shares ahead of the Jinheng shareholder vote.

2010-07-19Piper JaffrayReiterationOverweight$13.00
2010-07-14Brean MurrayReiterationBuy$16.00
2010-07-14Roth CapitalReiterationBuy$11.00
 

WATG shares trade for 9x our estimated FY10 earnings, below both U.S. peers (18x) and Chinese peers (11x). If the acquisition is consumated, we believe WATG shares should appear even more attractive. WATG has a strong management team and execution capabilities. Its market share in alternators and starters has continued to expand in China. Good trading liquidity and broad analyst coverage should allow the firm to trade premium over Chinese peers. However, with a slowing Chinese macro economy and domestic auto sales, we apply 12x to our estimated FY10 earnings, and maintain price target at $11. Download Full Report (PDF)

2010-07-13Rodman & RenshawReiterationOutperform$15.00
 

A subsidiary of Wonder Auto Technology Inc, agreed to acquire Jinheng (BVI) Ltd from Jinheng Automotive Safety Technology Holdings Ltd (872-HKG, Not Rated) for HKD1.1 billion (US$145.3 MM) in cash and promissory notes. Under the terms of the agreement, WATG’s subsidiary is expected to make an initial cash payment of HKD339 MM (US$43.6 MM) and issuance of promissory note worth of HKD791 MM (US$101.7 MM). The target company is an investment holding company for Jinheng (Hong Kong) Ltd, which with subsidiaries engaged in the manufacture and distribution of safety systems used in automotive such as air bags, safety belts, etc.

The target, Jinheng (BVI) Ltd, is a subsidiary of the Hong Kong listed Jinheng Automotive Safety Technology, which is 48.58% owned by a controlling shareholder company called Applaud Group Limited. Applaud Group Limited was incorporated in BVI by three major groups: Wonder Auto (20%), Yearcity Limited (17.46%), and other shareholders (61.64%). Upon the completion of this transaction, WATG, through Vital Glee, will own 100% stake of Jinheng BVI, and it will sell its shares of 20% of Applaud Group to Jin Ying Limited, a purchaser. Payment for the acquisition, once closed, may be made in four stages; WATG has secured bank loans and will use some of its own cash for the transactions. We are not expecting working capital related pressure as a result of this transaction.

2010-06-14Rodman & RenshawReiterationOutperform$15.00
 

At current levels CPBY is trading at a P/E multiple of ~7.5x to our 2010 US-GAAP earnings estimates. This multiple is below industry averages for similar players in the US and China. We believe CPBY should be trading at industry averages given the growth opportunity associated with it. We are comfortable maintaining our $11.00 price target for CPBY, which translates into a P/E multiple of ~15.5x to our earnings estimates for 2010. This compares to an average forward P/E multiple of ~32x for similar companies listed in China and ~18x for those listed in the US.

2010-06-01Global HunterReiterationBuyn/a
 

We expect to see a sizable acquisition in 2-3 months, which we view as a near term catalyst as it will likely bring upside to current '10 estimates. The company targets ~20% organic growth, and ~40% annual growth in the next 2-3 years with acquisitions. Relatively low forward P/E (9x 2010; 8x 2011) versus peers.

2010-05-11Maxim GroupReiterationBuy$14.00
2010-05-07Merriman Curhan & FordDowngradeNeutraln/a
2010-05-07Rodman & RenshawReiterationOutperform$15.00
 

We are now projecting 2Q10 revenue and net income to be $66.4MM and $6.1MM on a GAAP basis, with fully diluted EPS of $0.18. Excluding non-cash stock based compensation, the non-GAAP net income and EPS are estimated to be $7.7MM and $0.23 per share.

2010-05-07Brean MurrayReiterationBuy$16.00
 

We are fine tuning our 2010 revenue estimates to $262 .5 million and leaving our non-GAAP EPS estimate unchanged at $0.91. Our 2011 revenue and non-GAAP EPS projections are $320.4 million (+22% YoY) and $1.07 (+18% YoY), respectively. Please note that our estimates do not factor in the earnings impact from potential acquisitions. We believe Wonder has been actively looking for business expansion opportunities through acquisitions, with a potential deal likely to be announced in 2Q10.

2010-04-27Rodman & RenshawReiterationOutperform$15.00
 

We are comfortable maintaining WATG a $15 price target, which translates into P/E multiple of ~18x to our estimates for 2010. This compares to an average forward P/E multiple of ~23x for similar companies listed in China and ~22x for those listed in the US. We believe this is a reasonable multiple for a company that has multiple product lines, exposure to growth in the passenger vehicle market, acquisition capabilities and a healthy balance sheet.

2010-04-08Brean MurrayInitiationBuy$16.00
 

Our target price represents 15x our 2011 EPS estimate of $1.07 (+17% YoY) and 18x our 2010 EPS estimate of $0.91. Wonder Auto’s U.S. peer group is trading at 15x consensus 2011 EPS estimates and 22x consensus 2010 EPS estimates, and the domestic peer group is trading at an even higher level. We believe WATG should trade at least on par with its peer group, given the solid growth momentum of the China auto industry and Wonder Auto’s proven track record of strong execution.

2010-02-19Maxim GroupInitiationBuy$14.00
2010-01-21OppenheimerInitiationOutperform$16.00
2009-11-23JefferiesInitiationBuy$15.00
WATG
Automobiles
SCORE
8
UNDER REVIEW
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Current Price:  n/a
F10k Day (2006-11-07): -100.00%$3.80
2009 Close: -100.00%$11.74
2010 Close: -100.00%$7.54
2011 Close: -100.00%$0.81
High (2012-08-15): -100.00%$1.01
Low (2012-09-06): -100.00%$0.09
Exchange: N/A
Market Capitalization: n/a
Total Shares: 33.86 mill
Float: n/a
Avg Volume: n/a
Short Interest: 4.21 mill
Short Ratio: 17.04%n/a
Last Quarter: 2010-09-30
Revenue (MRQ): 78.83 mill
Net Income (MRQ): 13.58 mill
Op. Cash Flow (MRQ): 11.72 mill
all financial data provided without warranty