Although there are a few exceptions here and there, it seems safe to say that American investors' indiscriminate obsession with all things China is long past. A spate of accounting scandals reminded investors of the corporate governance risks, while inconsistent (if not outright disappointing) performance dispelled the fantasy that anything Chinese was synonymous with instant growth.
SORL Auto Parts (Nasdaq:SORL) saw both the rise and fall of that love affair. This Chinese commercial brake company saw the occasional run on its shares on the back of breathless "China will change everything" nonsense, but the stock has since come down significantly, as retail investors got bored and issues within the Chinese economy slowed growth. Here and now, though, this may be the sort of obscure stock that patient investors want to check out more thoroughly.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Mixed End to the Year
SORL Auto Parts certainly didn't close the 2011 year on an especially robust note. Revenue was up around 2% overall, with domestic OEM revenue down roughly 10%, domestic aftermarket revenue up almost 14%, and international revenue up nearly 27%. The growth in the aftermarket and international sales is certainly welcome, but the sluggish OEM sales are a direct byproduct of the challenging economic environment in China right now.

Profitability was definitely mixed. Gross margin improved about a half-point, but operating income fell by more than half. First of all, SORL is seeing the same sort of labor cost inflation that is impacting almost every Chinese company these days. Just as important, the company is not stinting on its growth or expansion plans and that's leading to a larger, less leverageable cost base in the near term.

SEE: Investing In China

Opportunity Today Vs Opportunity Tomorrow
I was a little disappointed, but not terribly surprised, to see management give guidance for 2012 that's little better than the results for 2011. Conditions in China are tough now; banks have cut lending activity pretty substantially, and that's filtering down through the economy, as the Chinese government tries to find that happy medium between growth and inflation.

Longer term, I still think there are reasons for optimism. SORL customers like Dongfeng (OTCBB:DNFGY) and Tata (NYSE:TTM) continue to grow and become more viable on the international stage. At the same time, the company likely has to show that it can compete on the international stage against companies like Honeywell (NYSE:HON), TRW (NYSE:TRW) and Federal-Mogul (Nasdaq:FDML) to really work.

Can it be done? Little known Bharat Forge came out of India and has become the second-largest forging company in the world for products like auto and commercial vehicle chassis. Some of this may have come from fortuitous timing and a lucky break here or there, but exceptional leadership played a key role. Now, the fact that Bharat did it does not mean that SORL will. I simply make the point that emerging market companies can become big players in established markets over time, if they are well-run.

SEE: What Is An Emerging Market Economy?

The Bottom Line
The good news is that SORL does not need to supplant Federal-Mogul or TRW to work as a company or a stock. If the company can grow its revenue by about 9% over the next five years, produce mid-single-digit free cash flow margin (which would, admittedly, be quite an improvement over historical performance), and maintain high single-digit free cash flow growth for another five years after that, the stock should be in the double-digits.

That sort of revenue growth doesn't seem so hard to believe, given the expected growth in the Chinese commercial vehicle market (as seen by the likes of Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI)), but by no means is this a sure thing. SORL represents a risky bet on potential, but this is a real company with real customers that arguably should not trade at half its tangible book value.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!