6 Stocks To Play The Asian Car Boom

Tony Sagami

I don’t get it.

I’m talking about spending upwards of $100,000 (or more) on a car. Sure, I dreamed about owning a Porsche or Ferrari when I was a young man, but that was when I had no money and even less brains.

I will forever be the son of a frugal farmer, so a Ford or Chevy pickup will do just fine for me, thank you.

But hey, a lot of people feel very differently because I see a lot of BMWs, Mercedes, Range Rovers, and other expensive luxury/sports cars wherever I go in the United States.

It surprised me when I traveled to Asia, but the streets in Tokyo, Taipei, Singapore, Kuala Lumpur, Bangkok, Shanghai, and Beijing have just as many — if not more — of those high-priced luxury/sports cars as any city in the United States.

That’s quite a change from 20 years ago when the primary mode of transportation in China was a bicycle. Not anymore.

Today the streets of major Chinese cities, such as Beijing and Shanghai, are so clogged with cars that it can take hours to go a couple of miles. In fact, China is now the largest auto market in the world, and car makers from all over the world are tripping over each other to get into China.

According to J.D. Power & Associates, emerging markets — lead by China — accounted for 51% of global passenger vehicle sales in 2010.

The future looks even brighter. J.D. Power expects passenger vehicle sales to increase by 60% by 2015 lead by India, Brazil, Russia and China (at the forefront).

J.D. Power projects auto sales in China to hit 29 million by 2015, a whopping 37% of the total global production.

General Motors, while not considered a luxury, is the top auto seller in China. GM and its Chinese partners sold 2.35 million vehicles in 2010, which is more than GM sold in the United States.

For a company that would have died if not for a government bailout, General Motors has found new life thanks to China.

GM just reported pretty darn strong quarterly earnings.

The company earned $3.2 billion or $1.77 a share in profits in the first quarter. Revenues rose 15% to $36.2 billion.

I should add that GM’s profits included a $1.6 billion gain from selling the company’s stake in Delphi Automotive, its former parts division. Without one-time items in the quarter, GM earned $1.7 billion instead of $3.2 billion.

The U.S. Government's Underwater Investment in GM

The U.S. Treasury Department, which is the largest owner of GM shares, is trying to decide when and how to get rid of its 500 million shares. Remember, GM took nearly $50 billion in U.S. government aid to help it survive in 2009. While the U.S. government has been repaid about half that amount, the government needs to get an average of $53 a share to get all its money back.

General Motors went public at $33-a share back in November, and remains stuck in the low $30s, so the government has a long ways to go to break even.

Nonetheless, GM hasn’t made that much money since the SUV boom in the early 2000’s, and it was the fifth-straight quarterly profit since it emerged from bankruptcy in late 2009.

GM attributed the strong gains in the quarter to its small-car sales, such as the new Chevrolet Cruze, and its crossover vehicles such as the Chevrolet Equinox and GMC Terrain.

However, the real key to GM’s resurgence is its strong overseas business with $100 million of those profits came from South America and another $500 million from its Asia division.

China is now GM’s biggest market and GM estimates that it has a 14.7% market share of that booming market.

Last month, GM sold 203,367 vehicles in China. That is on top of the 2.35 million vehicles it sold in 2010, which by the way, is a 29% increase from 2009.

Is GM the best way to profit from the booming Chinese auto market? Nope.

Buying General Motors (GM) would not be my best stock advice, but that is not to say that there are not other opportunities to play the Chinese auto market.

Consider the following:

Option #1: Volkswagen. VW has a 14% market share in China, and while there are lots of inexpensive VWs on the road, there are also miles of black luxury Audis which are the preferred sedan by government officials and older mature wealthy businessmen.

China's Pent-Up
Auto Demand

Rank

Country

Vehicles per 1,000 people

1

U.S.A.

779

2

Luxemburg

697

3

Iceland

658

4

Australia

619

5

Puerto Rico

617

6

Italy

571

7

Canada

563

8

New Zealand

560

9

Austria

558

10

Germany

558

72

China

128

Audi sold its 1 millionth car in China in October and expects to sell another 1 million within three years. Audi is produced and owned by Volkswagen.

Audi sales in China rose 48% last year to 237,000 vehicles. This year, Audi expects sales in its biggest foreign market to reach 280,000 vehicles. By comparison, Audi sold just under 102,000 vehicles in the United States in 2010.

The luxury auto segment in China is growing by 60% a year. “Demand outstrips supply for our vehicles,” said Klaus Maier, the president the China Mercedes-Benz division.

Option #2: BMW. BMW is enjoying similar demand with sales in China jumping 72% in the first-quarter as a growing army of the super-rich fuels demand for luxury cars, especially its 5 series and the four-wheel drive X3.

China accounts for about 15% of BMW’s worldwide sales, up from about 12% a year ago, and is hot on the heels of the United States and Germany, BMW’s two biggest markets.

BMW, which also owns the Rolls-Royce and Mini brands, said yesterday first-quarter operating profit rose more than fourfold to 1.9 billion euros.

Option #3: Porsche. The younger Chinese millionaires prefer speed over comfort, and Porsche is making more money than ever. Porsche more than doubled its first-quarter profits to $728 million.

Plus, Porsche has a nice kicker in that it owns 18% of Volkswagen, so you get both VW and Audi exposure when you buy Porsche stock.

All three of these luxury auto stocks trade on the U.S. over-the-counter market. Here are their tickers:

BMW (BAMXY.PK)

Volkswagen (VLKPY.PK)

Porsche Holdings (POAHY.PK)

Lastly, there are three Chinese auto parts stocks that are traded in the United States on the NYSE and Nasdaq:

Chinese Automotive Systems (CAAS), a leading supplier of power steering components and systems for Chinese passenger automobiles and commercial vehicles.

SORL Auto Parts (SORL) is a leading supplier of automotive brake systems and other key safety related auto parts to automotive original equipment manufacturers, or OEMs.

Wonder Auto Technology, Inc. (WATG) is a leading manufacturer of automotive electric parts, suspension products and engine components for passenger and commercial vehicles in China. Its core products include alternators, starters, engine valves and tappets, and rods and shafts for use in shock absorber systems.

As always, you need to do your homework and decide whether any of these securities are appropriate for your personal situation and financial goals. And as you know, timing is everything when it comes to investing, so you should wait for these to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you’ll ever make.


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Posted 05-13-2011 11:23 AM by Tony Sagami