Three Top Chinese Auto Sector Picks

China’s economy continues to surge forward, with GDP growth in 2008 estimated to be a superlative 11%, according to China International Capital Corporation. The Asian Development Bank similarly forecasted GDP growth of 10.8% this year.

An area that I continue to like is the country’s auto sector, which is booming and helping to offset growth issues in North America for the large U.S. automakers.

Within China, there are also numerous smaller companies that have good potential to reap the benefits of increased spending in the auto sector. Below, please find three small Chinese auto-based companies that I like in the speculative category.

A small-cap that we continue to like is China Automotive Systems, Inc. (NASDAQ/CAAS), a maker and seller of power steering components and systems to the Chinese automotive industry. The company is looking at acquiring another 36.5% of Henglong Automotive Parts Company, a maker of power steering systems and components. China Automotive presently holds a 44.5% stake in Henglong. In another potentially key development, China Automotive, which is looking at expanding into the U.S. market, announced that it had signed its first aftermarket supply contract to supply power steering products to R&B in the U.S. R&B is an aftermarket supplier. We view the deal as significant, as it confirms China Automotive’s quality, because it needed to pass strict testing to enter the U.S. market. Success here could open up new doors for China Automotive with R&B as well as other suppliers in the U.S.

A micro-cap Chinese auto parts company that you may want to take a look at is SORL Auto Parts, Inc. (NASDAQ/SORL), a developer and manufacturer of automotive air brake valves. Based in Ruian City, China, the company is ranked number one in total market share for air brake valves used in commercial vehicles that weigh over three tons, including trucks and buses, which is its key market.

A third Chinese auto-related company that you may want to take a look at is Wonder Auto Technology, Inc. (NASDAQ/WATG), a maker of automotive electrical and suspension parts in China. Wonder Auto estimates that FY07 earnings will surge 64% year- over-year to over thirteen and a half million dollars from $8.2 million the previous year. Revenues for the FY07 are expected to be in excess of one hundred million dollars compared to just over seventy-two million dollars in FY06. For the FY08, earnings are predicted at over twenty million dollars on revenues of over one hundred and forty million dollars, which are both above the analysts’ estimates gathered by Thomson Financial. We continue to like the valuation of Wonder Auto, which is trading at about 14.45 times its estimated FY08 EPS of $0.80 and a PEG ratio of 0.75.