China Automotive Systems, Inc. Earnings: Margins Suffer for Five Quarters Straight, Profit Drops

China Automotive Systems, Inc. (NASDAQ:CAAS) reported its results for the second quarter. China Automotive Systems, Inc. is a holding company, which through joint ventures in China and a wholly-owned subsidiary, manufactures power steering systems and other component parts for automobiles.

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China Automotive Systems Earnings Cheat Sheet for the Second Quarter

Results: Net income for the auto parts company fell to $3.9 million (14 cents per share) vs. $23.9 million (28 cents per share) a year earlier. This is a decline of 84% from the year earlier quarter.

Revenue: Fell 3% to $82.5 million from the year earlier quarter.

Actual vs. Wall St. Expectations: CAAS reported adjusted net income of 16 cents per share. By that measure, the company fell short of mean estimate of 29 cents per share. It fell short of the average revenue estimate of $96.7 million.

Quoting Management: Mr. Qizhou Wu, Chief Executive Officer of China Automotive Systems, commented, “With the expiration of government incentive policies and monetary tightening, China’s auto output and sales have slowed after two years of rapid growth. In this environment, we are focused on strengthening our relationships with key OEMs that we believe will lead the sector’s recovery. We believe that in downturns such as the current one, OEMs focus on upgrading vehicle quality and making key supplier decisions, especially in the area of safety-related components. CAAS has built a powerful research and development program and it has created new products that match global quality and performance standards. Continuing to generate free cash flow is our goal while we carefully manage our financial risks. We are confident that these strategies will position us to capitalize on the eventual recovery of the automotive market, which may start as early as the 2011 fourth quarter.”

Key Stats:

Last quarter marked the fifth straight quarter that the company saw shrinking gross margins as gross margin fell 5.4 percentage points to 17.9% from the year earlier quarter. Over that time, margins have contracted on average 5.8 percentage points per quarter on a year-over-year basis.

A year-over-year revenue decrease last quarter snaps a streak of four consecutive quarters of revenue increases. The best quarter in that span was the second quarter of the last fiscal year, which saw revenue rise 36.2%.

Last quarter’s profit decrease breaks a streak of two consecutive quarters of year-over-year profit increases. Net income rose 90% in the first quarter and more than threefold in the fourth quarter of the last fiscal year.

The company has now fallen short of estimates in the last two quarters. In the first quarter, it missed expectations by 10 cents with net income of 22 cents versus a mean estimate of net income of 32 cents per share.

Competitors to Watch: Sorl Auto Parts, Inc. (NASDAQ:SORL), Tenneco Inc. (NYSE:TEN), Wonder Auto Tech., Inc. (NASDAQ:WATG), TRW Automotive Hldgs. Corp. (NYSE:TRW), Tower International (NYSE:TOWR), Dana Holding Corporation (NYSE:DAN), American Axle & Manufact. Hldgs., Inc. (NYSE:AXL), and Federal-Mogul Corporation (NASDAQ:FDML).

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(Source: Xignite Financials)