SORL Auto Parts (SORL) is trading sharply higher today (+22%) after reporting Q4 results this morning. Since you're probably not familiar with SORL, a little background would help. SORL is a supplier of brake and control systems to the commercial vehicle industry in China. In fact, it's the market leader for commercial vehicles brake systems, such as trucks and buses, in China. Its sales are broken down as follows: China OEM (roughly half of revenue), China aftermarket (25%) and international markets (24%).
SORL has been benefitting from greater urbanization in China (more people in cities, means more buses) and the Chinese government's increased support for public transportation to combat the country's notorious air pollution. China has also been seeking to rely more on Chinese-made goods rather than imports.
SORL says it has been taking market share, especially in the commercial vehicle market. Also, of note, SORL says that the rising expiration of OEM warranties from higher new vehicle sales in the recent past is helping to push its aftermarket business in China. With that said, SORL remains highly speculative. It's a Chinese microcap name that has been trading under $5 for most of the past few years, so we would be cautious.
Turning to the Q4 results, EPS jumped 39% YoY to $0.43 while revenue rose 46% YoY to $82.9 mln. Both results were above market expectations. For 2017, management expects sales to come in around $300 mln, up from $272.1 mln in 2016 and $218.7 mln in 2015.
SORL says it closed out the year on a high note. As the market leader in China, SORL decided to cut prices in order to place greater pressure on some of the low-margin or low-quality smaller companies. As a result, SORL's gross margin temporarily declined in Q4. However, with improved economies of scale, successful receivables collections and effective cost control programs, SORL says that its operating margin remains attractive.
SORL is excited about the compound effect from the growth in both the Chinese truck market and SORL products' traction in the marketplace. Its leadership in the braking system market in China places SORL in the most favorable position as OEMs and large aftermarket distributors tend to turn to reputable and large-scale brake system producers to meet their surging demands.
In sum, SORL is a play on the Chinese government's goal to crackdown on pollution. As a result, SORL is seeing increased orders in the first half of 2017. As the Chinese government is determined to tackle the air pollution problems, SORL expects the ongoing anti-overloading regulation campaign and new National 5 emission standard will increase the market size of trucks and accelerate the replacement of old trucks. SORL believes that it's well positioned to capture these market opportunities. With that said, SORL remains a speculative name as it's a Chinese microcap that has been trading under $5 for most of the past few years.