Description

This is a small cap listed in Hong Kong with limited liquidity.

BWI Group is a chassis supplier that designs and makes brake and suspension systems for global car manufacturers. Back in 2009, Bejing West Industries (BWI Group), along with its global subsidiaries, acquired what was formerly the chassis division of Delphi corporation. BWI Group itself is a joint venture of Shougang Group (stated owned enterprise) and Beijing Fangshan asset management (stated owned asset management platform). BWI’s products include controlled suspension systems, active stabilizer bar systems, electronic level control systems, and complete brake systems.

In January 2014, BWI Group acquired a shell company (BWI International) in Hong Kong and completed a reverse merger. BWI Group currently controls 52% of BWI International. In terms of assets, BWI Group has put its Europe division and 51% of its China division into BWI International. BWI International now has manufacture facilities and research centers in Poland, France, and UK. Its main customers are: Jaguar and Land rover(49%), Porsche, Ferrari, and Lamborghini(28%), BMW(11%), Volvo(3%), Peugeot Citroen(4%).

The company trades at very cheap level by trailing numbers:

Market cap = 810M HKD

PE = 7.5

PB = 1.03

PS = 0.18

Cash = 517M HKD

The big question is how representative last twelve month numbers are. The company surprised investors by releasing an earning warning several days ago. Profit for first half of 2017 turned negative compare to earning close to 100M HKD same period last year. The company named a few reasons for the poor performance: rising price of raw material such as steel, new factory in Czech Republic run below capacity, and major clients delaying launch of new models.    

We believe the setbacks are temporary. We did a detailed analysis on company sales in terms of major customers and region. Sales from Land rover models dropped 11%, sales from Jaguar models actually increased 39% while sales from other clients such as Porsche, Ferrari, Lamborghini, and BMW didn’t change much. In terms of region, Europe exclude UK dropped 2%, UK fell 23%, China went up 16%, and the US went up 23% (US division is not part of BWI International yet, more on this later). UK sales dropped a lot because after a Chinese QiRui / Land Rover joint venture, some of the orders were given to other companies in China.  We don’t think the loss of Land Rover orders to competitors means the company is losing its competitive advantages to cheap competitors. For the last two years, BWI International spends heavily in research in partner programs with its major clients. We think it still has advantages in high end models. As Jaguar and Land Rover start to roll out new models planned for 2017 and 2018, BWI should see sales in UK recovering. There are 16 new models in Land Rover’s pipeline and its parent company, Tata, has said that it will invest almost 4 billion pound annually in UK for product development and expansion.

We also believe current results are depressed because of heaving capital expenditures. BWI has invested 200M HKD in a new manufacture facility in Czech Republic, which started production in April. The company has also started to construct a new factory in China in June.

As mentioned above, BWI International does not have all of BWI Group’s assets yet. 49% of China division and 100% of US operation still belong to the group, not to the public company. The management has said that the whole group will eventually be injected into the public company, creating a catalyst to unlock value. Although can’t be proved, we suspect that management wanted the stock to drop so they can accumulate more shares before injecting more assets into the public company.

Catalyst

product up cycle

Parent company injecting more assets