On August 13 this year, in pre-market trading, china automotive systems (CAAS.US) disclosed its 2024Q2 financial report, which showed a year-on-year revenue growth of 15.4%, and the management also reaffirmed the full-year revenue expectation of 0.605 billion dollars for 2024. Encouraged by this financial report, china automotive systems' stock price rose by 5.29%.

By November 13, china automotive systems disclosed its Q3 financial report in pre-market trading, showing a year-on-year revenue growth of 19.4%. Meanwhile, the company's management also raised the full-year revenue guidance to 0.63 billion dollars. However, despite this better-than-expected financial report, the secondary market's performance was completely opposite.

Is the bullish news like 'boiling frogs in warm water'?

According to observations from the Zhitong Finance APP, after the Q3 financial report, china automotive systems' stock price experienced two consecutive declines, closing down 4.55% and 3.63% on November 13 and 14 respectively. The divergence between the stock price movement and the fundamentals is clearly not a bullish signal.

From the stock price trend since October this year, after a surge in volume at the end of September, china automotive systems began to enter a correction phase at the beginning of October and only stabilized and rebounded around October 23. However, investors can clearly see the difference in the company's performance in terms of volume and price between the end of September and the end of October.

At the end of September, after the stock price started, the trading volume of the stocks almost maintained a daily steady increase, rising from 0.0508 million shares on September 20 to 0.4408 million shares on September 30. However, during the end of October, the trading volume of china automotive systems only increased on three trading days from October 24 to 28, and then showed a significant contraction in the fluctuating upward range from October 30 to November 11. For instance, from November 5 to 8, as the company's stock price rose from a low of 4.47 dollars to a high of 4.79 dollars, the corresponding trading volume shrank from 0.0952 million shares to 0.0312 million shares. During the three consecutive declines from November 12 to 14, the corresponding trading volume also fell from 0.0742 million shares to 0.0342 million shares.

It can be seen that during the stabilization and correction phase in late October, china automotive systems exhibited two signals of 'volume decrease during price increase' and 'volume decrease during price decrease', which may be the reason for the divergence between its stock price trend and fundamentals.

From a valuation perspective, after the significant rally at the end of September, china automotive systems' overall pb valuation has exceeded historical averages and is now running above a reasonable range, with the current pb at 0.37 times, exceeding 70% of historical data.

From the position cost distribution chart, comparing the situations of November 7 and November 14, in the context of china automotive systems in late October, the low price point of $4.09 from the prior price correction did not reach the average cost of $3.92, resulting in a poor overall washout effect. Additionally, the correction attracted some short-term funds looking to buy the dip, leading to a significant profit range and a large number of profitable positions, with a profit ratio of up to 97.65%.

From this perspective, at the end of October, the entering funds were relatively consistent regarding the high risks of china automotive systems and future trends, and capital also actively reduced its entry. At this time, the phenomenon of a rising market without volume and divergence in volume and price indicates a topping signal.

Generally, after a company discloses its financial report, the main funds in the market tend to choose to unload with increased volume; however, china automotive systems behaved quite the opposite. According to Zhito Finance APP, even though shrinking volume often suggests weakened selling pressure and is somewhat a normal price-volume relationship, under the premise of prior accumulated gains, the main funds may slowly unload using a method of gradual decline in volume, akin to 'boiling a frog in warm water.'

Whether or not the market is performing well also depends on the downstream conditions.

Whether it be the high-volume decline or the double-peak concentration shown in the position cost distribution chart, both are signaling that the current adjustment for china automotive systems is unlikely to reverse in the short term; however, looking at a longer timeframe, this is merely a new round of valuation regression supported by fundamentals.

Compared to the steady rise of the Nasdaq index this year, china automotive systems' stock price performance is clearly more explosive. From the trend chart of increases and decreases, in the first half of the year, china automotive systems' stock price increase was mostly below that of the Nasdaq index; however, starting from the end of June, the company's stock price began to surge significantly, reaching a maximum increase of 74.35% during the market at the end of September.

It can be observed that china automotive systems' stock price has seen continuous fluctuations this year but is overall in an upward trend. Combined with the latest disclosed Q3 financial report, the company's revenue for that period grew by 19.4% year-on-year to $0.164 billion; the net income attributable to the parent company's ordinary shareholders was $5.5 million; and the company's gross profit increased by 6.5% year-on-year to $26.4 million, with a gross margin of 16.0%. As mentioned earlier, china automotive systems' revenue growth rate in Q3 achieved further growth on a quarterly basis, prompting the management to raise the annual performance guidance, mainly due to the increase in sales volume of the company's passenger vehicle EPS.

From a market perspective, according to the "Smart Electric Chassis Technology Roadmap" released by the Electric Vehicle Alliance, the development goals for the line-controlled steering system of passenger vehicles are: By 2025: The line-controlled steering system meeting L3+ level autonomous driving will be internationally leading, with core components at L3+ level having independent design capabilities entering the small batch trial assembly stage, and the penetration rate of line-controlled steering reaching 5%. By 2030: The line-controlled steering system meeting L4+ level autonomous driving will be internationally leading, with core components at L4+ level having independent design capabilities entering the small batch trial assembly stage, and the penetration rate of line-controlled steering will reach 30%.

However, at present, SBW line-controlled steering has not been widely popularized, and redundant EPS remains the core technology in current L3+ autonomous driving scenarios. Compared with traditional non-redundant EPS, redundant EPS requires a more complex system architecture and more complicated functions to ensure the safety, reliability, and driving experience of the vehicle, thus having higher technical barriers.

The corresponding EPS market size is significantly growing. According to data from Bezhise Consulting, in 2023, the global automotive EPS market size reached 261.534 billion yuan, of which the domestic market size amounted to 96.454 billion yuan. It is worth mentioning that the current penetration rate of EPS in the passenger vehicle market is nearing its peak. According to QYResearch data, looking at global downstream applications of EPS, passenger vehicles are the largest downstream market, accounting for 91.5% share. In the context of China’s passenger vehicle steering system market, the EPS penetration rates in the Chinese passenger vehicle market from 2020 to 2022 were 96.5%, 97.6%, and 98.8% respectively, which are basically close to the peak.

From a market structure perspective, the main global EPS manufacturers include JTEKT, Bosch, Nexteer, ZF, and Japan Precision, etc. According to QYResearch data, the top five manufacturers in 2022 accounted for 80% of the market share, with the largest manufacturer being JTEKT, accounting for 30%. In comparison, domestic EPS suppliers have a relatively small share, but there is considerable potential for domestic substitution.

According to the financial report disclosed by China Automotive Systems, in 2023, the company increased its sales efforts in China, resulting in the sales proportion from the Chinese region rising further to 65.1% of the company's revenue.

In fact, the performance growth of China Automotive Systems and the entire EPS component industry mainly stems from the hot downstream market for domestic passenger vehicles.

Taking the 2024 H1 financial report disclosed by the industry leader Nexteer as an example, in the first half of this year, Nexteer experienced rapid growth in the Asia Pacific market, primarily in China. In the first half of 2024, about 38 projects were put into production, 23 of which were from the Asia Pacific region, driving Nexteer's Asia Pacific revenue to grow significantly by 27.5% year-on-year to 0.595 billion dollars; in terms of orders, Nexteer obtained orders worth 2.1 billion dollars in the first half of 2024, of which orders from Chinese vehicle manufacturers accounted for as much as 43%, and the order scale was nearly three times that of the same period in 2023.

Thanks to the recovery growth of domestic downstream passenger vehicle sales in recent years, there has been an incremental market opportunity for the automotive power steering industry. Compared to domestic counterparts, China Automotive Systems has scale and cost advantages, which gives it a certain lead in the domestic EPS substitution, making it easier to attract market attention when a downstream peak market arrives.