China's developing highway infrastructure augurs growth in its car ownership.
CAR OWNERSHIP in China is rising rapidly: Three million passenger cars were sold in China during Jan-May 2008, a 17.4% rise y-o-y.
The soaring demand has translated into strong profit growth for SGX-listed aluminum alloy wheel maker Lizhong Wheel.
Sales grew 43.1% (CAGR) over the past 5 years, while net profit grew 55.6%.
Money Mind telecast an interview with Lizhong Wheel's CEO Zhang Jianliang last Sunday, and discussed whether the wheel maker will be affected by rising oil prices and costs of raw materials.
”China’s automobile industry has been growing at a remarkable rate since 2001 - about 30% a year. Annual sales of passenger cars made in China is likely to top 10 million by 2010,” says Mr Zhang.
This booming demand has attracted the attention of carmakers worldwide.
Lizhong Wheel supplies aluminum alloy wheels to foreign carmakers such as General Motors, Toyota and Hyundai, as well as local carmakers.
It believes it will be able to maintain strong sales and profit growth in the near to medium term, despite an expected slowdown in global car purchases resulting from escalating oil prices.
Mr Zhang told Money Mind that the car population in the US is currently at 130 million, 70-80 million in Germany, and 70-80 million in Japan.
China has a car population of only 40-50 million.
Mr Zhang believes that the development of highway infrastructure in China reflects the growth potential for car ownership by the Chinese population at large.
Lizhong Wheel has been ramping up production: it has just completed the first phase of a plant in Tianjin which will raise the company’s annual production by 56% to a total of 5.6 million wheels a year.
Consensus broker price target of 88.5 cents is 74% upside against last close price of 51 cents.
At the same time, it has been sharpening its technological edge.
Last year, the company acquired China’s first production line for “flow-formed” wheels.
“Flow-forming” technology was developed in America and Germany, with wide applications for aeronautical, aviation and military purposes.
Mr Zhang revealed that a well-known carmaker has placed orders for “flow-formed” wheels, and expects Lizhong Wheel to deliver its first batch next year.
Despite a macro environment of rising operating costs, the company has maintained its gross margins (at above 15%).
Over the past two years of negotiations, Lizhong Wheel and its customers have come to agree that contract prices will be pegged to aluminum prices.
Read about the technical advantages of “flow-formed” wheels: LIZHONG WHEEL'S profit up 34%; UOB Kayhian's target price $1.07
