SORL Auto Parts (SORL) is trading sharply higher today (+19%) after reporting Q1 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. Since the Chinese government introduced rigorous regulations on overloading in the truck market to reduce emissions and improve safety, SORL has been gaining market share with its advanced new products.
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 Q1 results, EPS jumped to $0.36 from just $0.02 in the prior year period while revenue rose 37.4% YoY to $73.9 mln. Both results were above market expectations. For 2017, management upped its sales guidance to approximately $315 mln, up from prior guidance of around $300 mln. That compares to 2016 revenue of $272.1 mln and $218.7 mln in 2015.
SORL says it's pleased to announce another quarter of robust performance as it posted growth in all lines of its business and achieved margin expansion. As mentioned above, the Chinese government recently introduced rigorous regulations on overloading in the truck market to reduce emissions and improve safety. This has helped push sales for SORL‘s advanced new products. On the cost side, SORL continued to exceed its goals due to significantly improved economies of scale, strengthened receivables collections and better-than-expected cost control results.
Revenue from its domestic OEM customers were $41.8 mln, an increase of 48.8% YoY, fueled mainly by higher truck sales, especially trucks in the heavy-duty segment. SORL's aftermarket sales in China grew by 37.1% YoY to $18.1 mln. New vehicle sales in China and the expiration of their OEM warranties assisted aftermarket business growth. Revenue from SORL's international markets sales increased 12.0% to $14.0 mln.
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, so be careful with the stock.