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. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center