China Automotive Systems (NASDAQ:CAAS) is on a run. CAAS stock is up over 106% over the past year, even though it has recently slipped. At the end of November, the stock was at $10.50.
At $6.34 at the start of this week, the shares are down more than 39% in December. But that doesn’t look like it will last as CAAS stock is set to move higher again over the next year.
CAAS is on a growth glide path delivering its steering systems in an industry in China that is growing.
CAAS Stock Has a Very Cheap Valuation
Moreover, CAAS stock is very cheap despite its growth prospects. For example, the company predicted in its latest earnings report that it would produce $390 million in revenue this year. This was an increase of $30 million from their prior forecast.
But here is the point about the valuation for CAAS stock: Its market capitalization is just $210 million. That means that even at $6.34 the stock is trading at just 53.8% of its sales per share.
Moreover, analysts expect China Automotive Systems will make revenue of $475 million next year. That is a gain of almost 22% in sales over the next year. But markets tend to look forward. Therefore, the stock is at just 44% of its forward forecast sales (i.e., $210 million divided by $475 million.
This is almost unheard of in the electric vehicle (EV) sector. Granted, China Automotive Systems makes steering systems for both non-EV and EV systems, but the growth is in EVs.
For example, sales of EVs in China doubled year-over-year in the month of October to 144,000. In fact, China Automotive Systems itself has supplied 120,000 electric power steering systems for EVs throughout 2020. This means its market share is close to 9% of the total EV market for electric steering systems. And that market share is both growing along with the pie, so-to-speak.
So you would think its market capitalization should start to reflect this growth. Most stocks in this sector have price-to-sales ratios that are multiples of revenue, not a fraction of sales.
Moreover, analysts forecast that in 2021, China Automotive Systems will make positive earnings per share (EPS) of 36 cents per share. This puts CAAS stock at just 17.6x forward EPS.
What To Do With CAAS Stock
So far, there is just one analyst covering CAAS stock, according to CNN Business. It shows a price target of just $4.00, although it has not been updated recently.
However, it stands to reason that the stock will do well over the next several years. For one, Beijing is actively promoting EV adoption. For example, they have set a goal of having at least 25% of all new cars by 2025. However, analysts are predicting that just 20% of this level will be hit by then.
Here is one way that goal is being put into practice. A recent Shanghai rule says that certain elevated roads will not be open to cars with license plates with non-Shanghai license plates. Analysts say this promotes the plates that can be obtained in Shanghai from Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO), both EV makers.
Moreover, we can estimate sales at CAAS by 2025 based on projections. For example, several years ago, Reuters reported that China expects to make 35 million cars annually by 2025.
Therefore, one-fifth of that will be 8.75 million EVs. Now, if China Automotive Systems gets say 9% of that market with its electric power steering systems, that would be 787,500. This is significantly higher than its present 120,000 EV power steering systems (see above).
In other words, we can expect to see sales at China Automotive Systems to grow by about 5x by 2025 year-end. That works out to an average growth of 37.5% annually for the company in just its EV sales. Those sales are 14% of total sales.
This means that CAAS stock is very cheap if you look forward to the future growth of the company.
On the date of publication, Mark R. Hake has a long position in Tesla (TSLA).