Cash-rich China Automobile Parts looking at acquisitions

By Chen Shaua Fui / Digital Edge Daily   | August 3, 2015 : 10:02 AM MYT   

China-Automobile-Parts-Holdings-Bhd_Chart_DED_3aug15_theedgemarketsKUALA LUMPUR: China Automobile Parts Holdings Bhd (CAP) ( Financial Dashboard) is on the lookout for acquisition targets to strengthen its core business in China’s automotive parts manufacturing industry, said its managing director Li Guo Qing.

In the meantime, the China-based auto chassis components manufacturer is holding on to its cash amid the lukewarm economic activity in China.

“We see this (China slowdown) as an opportunity as the Chinese government has been cutting the number of its government-owned companies through a series of mergers in a bid to overhaul the country’s underperforming sectors. Some good companies may emerge out of this,” he told the DigitalEdge Daily in a telephone interview.

“As such, we would keep the cash ready to acquire potential auto parts suppliers to strengthen our core business,” Li added.

As at March 31, 2015, CAP (fundamental: 1.95; valuation: 1.8) had a cash reserve of 501.38 million yuan (RM307.54 million), of which 140 million yuan comprised fixed deposits. Its short-term borrowings stood at seven million yuan.

Meanwhile, the softening of China’s parts replacement market for commercial vehicles has impacted CAP’s results, which saw its net profit fall 43.9% to RM11.52 million for the first quarter ended March 31, 2015 (1QFY15) from RM20.52 million a year ago.

CAP has said that the group will find the current financial year ending Dec 31, 2015 (FY15) to be very challenging, as the market remains very competitive with pressure on selling prices.

Given the weak conditions, Li said the group is diversifying its business into rubber recycling by entering into a joint venture (JV) with SRI Elastomers Sdn Bhd.

Under the JV signed on March 18, 2015, both CAP and SRI Elastomers will jointly invest US$3 million (RM11.47 million) to set up a rubber-scrap recycling plant in Fujian Province, China, near its existing factory.

“We are still in the midst of discussions. If everything goes well, things will be clearer in the second half of 2015,” Li said.

He pointed to market research that shows SRI Elastomers’ patent technology, which uses the devulcanisation process and technology to recycle “end of life” tyres and processed rubber scraps into a rubber compound to be made into new value-added rubber products, has been well received by China’s enterprises.

Li is confident that the JV will bring “huge profit” to the group in the future, but said it is too early to give an earnings estimate from the partnership.

“China is a huge market. How well we can do with this project very much depends on how we promote the technology and how much capital we put in,” said Li.

On the group’s collaboration with German-based auto firm Protev Asia Ltd to venture into the European market which was announced in August last year, Li said: “We have provided our sample to Protev’s marketing channel. We need to send a team to Europe to meet them and they will give us the sample for R&D (research and development).”

“As we are now mainly producing auto parts for the Asian and Middle Eastern markets, we do not have a specific production line for the European market. Thus, we need some time to study the market,” he said.

Li also maintained that the proposed share swap deal between its major shareholder Guotai International Ltd and Australia-listed Siburan Resources Ltd (SBU) would prove beneficial to the group and shareholders in the long term.

In May this year, CAP announced that Guotai will sell a 16.67% stake in the company to SBU for RM60 million or 60 sen per CAP share. In return, Guotai will get 62.5% of equity interest in SBU.

However, the proposed deal has raised concerns as to whether CAP’s minority shareholders would benefit from the deal as the bulk of the shares were used as collateral for Guotai to venture into the tungsten exploration business in Australia.

“The deal is for the long-term benefit of CAP as this will be a platform that enables us to venture into the Australian market and bring the mineral product from Australia to China,” said Li.

“Yes, SBU is in debt in its exploration business, but it has found mineral. We believe their future prospect is good,” he added.

Upon completion of the stake acquisition, one of the current SBU directors will be appointed to the board of directors of CAP.

To a question, Li dismissed possibility of SBU influencing the business direction of CAP.

“In the tradition of CAP, the business direction and operations are decided by its executive directors. The non-executive directors merely play the monitoring role in the group’s business,” Li said, adding that should a SBU representative be appointed to CAP’s board, he or she would not affect its daily operations.

Year to date, CAP’s share price has risen 17.6%. The stock rose to a record high of 50 sen on May 20 and closed at 30 sen last Friday, with a market capitalisation of RM183.41 million.