Profit Doubles Wonder Auto's Exp - Analyst Blog

Wonder Auto Technology Inc. (WATG) has revealed that it expects to generate revenues of $445 million to $455 million for 2011. This is more than double compared with revenues of $211 million generated in 2009.

In the third quarter of 2010, Wonder Auto reported an 84% increase in profit to $11.94 million from $6.51 million in the same quarter a year ago. On earnings per share basis, profit improved to 35 cents from 24 cents in the third quarter of 2009 and the Zacks Consensus estimate of 22 cents.

The company's dramatic rise in profit was based on its acquisitions during the quarter as well as its organic growth of 18%, despite the fact that July and August are slow season months in the Chinese automobile market.

Revenues in the quarter appreciated 34% to $78.8 million, driven by a strong rise in sales of rods and shafts. Revenues from alternators increased 7% to $22.69 million while that from starters rose 15% to $23.03 million. China continues to be the major source of revenues for alternators and starters with 97% of sales during the quarter.

Gross profit surged 48% to $20.7 million (26.2%) from $14 million (23.7% of sales) in the third quarter of 2009. This was attributable to a decline in cost of revenues as a percentage of sales to 74% from 76% a year ago, driven by improved gross margin of engine valves and tappets as a result of higher sales to the heavy duty engine sector.

Despite the improved results and strong guidance, competition poses a threat to Wonder Auto. The company's primary competitors in China include Shanghai Valeo Automotive Electrical Systems, Hubei Shendian Auto Motor Co. and Zhongqi Changdian Co. Ltd. Its international competitors include Valeo (France), Bosch (Germany), Remy International (U.S.), Delphi (U.S.), Mitsubishi Motor (Japan) and Denso (Japan).

Further, Wonder Auto has high customer concentration, which hurts its prices. The company's top 10 customers accounts for about 75% of sales, with the largest two accounting for 30%. Major clients of the company include Beijing Hyundai Motor Company and Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd.

Due to these factors, the company retains a Zacks #3 Rank, which translates into a short-term (1–3 months) rating of Hold. We also reiterate our Neutral recommendation on the stock for the long term (more than 6 months).