Chinese automotive system company, CAAS (CAAS, Financial), reported a notable 19.4% year-on-year revenue growth in its Q3 earnings. The management also raised the full-year revenue guidance to $630 million. Despite these positive results, the stock experienced a downturn, dropping 4.55% and 3.63% in consecutive trading sessions.
The decline in stock price, despite strong financial performance, signals a disconnect with fundamentals. After a robust climb in late September, CAAS's stock entered a correction phase in early October, stabilizing only towards the end of that month. However, the nature of the price and volume changes during these periods varied, with late October seeing diminished trading volumes.
In particular, the company experienced both "low-volume rise" and "low-volume fall" signals, indicating potential reasons for the divergence between stock performance and company fundamentals. The current price-to-book (PB) ratio of the firm, now at 0.37, exceeds historical averages, suggesting it runs above the reasonable range.
Analysis of the stock's distribution revealed that the market correction failed to shake out a significant volume of profits due to the lower price movements not hitting prior average costs. Consequently, profit-takers accounted for a substantial 97.65% of stocks, indicating a high-risk assessment of CAAS by investors.
In the broader market, although CAAS's recent behavior predicts a tough short-term rebound, its long-term valuation potentially aligns with fundamentals. Over the year, CAAS's stock demonstrated significant volatility yet maintained an upward trajectory. Latest Q3 results show revenues of $164 million, net income of $5.5 million attributable to shareholders, and gross profits up by 6.5% to $26.4 million.
In the automotive industry, the electric power steering (EPS) market plays a crucial role. Current SBW steering technologies have not yet seen widespread adoption, leaving redundant EPS systems critical for autonomous driving capabilities. The global EPS market, according to consultancy data, reached approximately $261.5 billion in 2023, with the Chinese market alone accounting for $96.5 billion. Given the nearly saturated penetration rate in passenger vehicles, a transition is anticipated toward local EPS supplier dominance.
CAAS has increased its sales focus on China, with the region now contributing 65.1% of its revenue. This growth is primarily driven by the robust domestic passenger car market, matching trends seen in industry leaders like Nexteer. Nexteer’s strong performance in China reflects the increasing demand for automotive components, with significant project rollouts and orders heavily weighted in China, increasing profits significantly.
As the domestic passenger car market continues its recovery, CAAS is well-positioned to benefit from the EPS sector's growth. The company's scale and cost advantages provide it with a competitive edge in the domestic market, making it a notable player as market demand peaks.
