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The parts business is more scalable and provides more steady cashflow than moulds, says CFO Hau Khee Wee. NextInsight file photo

CHINA KUNDA, intent on increasing its exposure to China’s hot auto market, has signed a MOU for a stake in a JV to make plastic auto parts.

China’s auto sales rose a whopping 46.2% to 13.6 million vehicles last year, taking America’s spot as the world’s leading auto market, a position the latter had dominated for decades.

Nation-wide vehicles sales were driven by the 71% surge in sales of small cars (1.6 litres and below), as the central government had jump-started a stalled industry last January by halving purchase taxes for this category.

To ride on China’s burgeoning demand for cars, China Kunda, a precision mould maker for auto parts, now also wants to produce the plastic parts.

”The auto parts components business is more scalable and provides more steady cashflow than moulds,” said CFO Hau Khee Wee during an exclusive telecon interview with NextInsight this afternoon.

It signed an MOU to pump cash of Rmb 28.5 million for a 57%-stake in a JV to make plastic auto parts for Beijing Hyundai Automobile, which happens to be one of China’s top 10 automakers.

The fourth largest automaker by sales in China, Beijing Hyundai sold 521,000 vehicles in 2009 and recently announced plans to build a third automobile plant in Beijing to cater to the robust sales growth.

And Kunda's JV partner, Beijing Baiju Electrical Appliance, which makes plastic injection parts and metal parts, is closely connected to the automaker.

It will subscribe for 43% in the JV by transferring existing production equipment and automotive component moulds to the JV.

CHINA KUNDA

 
Recent stock price31.5 cts
Market capS$110.9 m
52-week high/low34.5 / 12.1 cts
Bloomberg est PE12.6 X
1H10 Cash Flow from OperationsHK$ 24.5m
Price/Book3.6 X
 
 
 Source: Bloomberg, Jan 13 

To lower the risk in its foray into auto parts making, Kunda plans to duplicate this JV structure with other auto parts makers in order to gain access to customers.

Auto parts makers are normally subject to a lengthy qualification process before being accredited to supply components, and such JVs provide ready sales channels to major automakers in China, allowing Kunda to bypass this qualification process.

”As the auto parts business requires suppliers to be near automakers, the long term plan is to duplicate this JV structure in major auto hubs like Changchun, Wuhan, Shanghai, and Guangzhou,” said Mr Hau.

Westcomb recently initiated coverage on the stock (4 Jan) with a target price of 36 cents.

The analyst, Lee Khai Chian, likes Kunda for its “solid customer base that mainly consists of owners of well-know international brands in Europe and Asia”, and exposure to China’s rapidly growing auto sector.

Kunda’s acquisition in Nov of a controlling stake in SXD, which supplies metal components to the automobile and electronics division of BYD is expected to jumpstart its auto parts division.
 
Kunda also plans to inject its advanced plastic injection technology into the JV, so that the unit can compete for higher-value and higher-margin products from its existing customer base.
 
Manufacturer2009 SalesMarket Share
Shanghai Volkswagen Co.708,1009.48%
FAW-Volkswagen Automotive Co.669,2008.95%
Shanghai General Motors Co.668,2008.94%
Beijing Hyundai Automobile Co.521,0006.97%
Dongfeng Motor Co459,3006.15%
BYD Co. Ltd.                  448,4006.00%
Chery Automobile Co.          409,3005.48%
Guangzhou Honda Automobile Co.337,2004.51%
Tianjin FAW Toyota Motor Co.  334,7004.48%
Geely Automobile Holdings Ltd.329,1004.40%
Market Share of China’s Top 10 Car Manufacturers in 2009
Source: China Association of Automobile Manufacturers


Related story: CHINA KUNDA: Targeting BYD for more business

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