SORL Auto Parts, Inc.
NASDAQ: SORL
Investor Presentation
April 2006
Safe Harbor Statement
This presentation contains "forward-looking statements" within the meaning
of the “safe-harbor” provisions of the Private Securities Litigation Reform Act
of 1995. Such statements involve known and unknown risks, uncertainties
and other factors that could cause the actual results of the Company to differ
materially from the results expressed or implied by such statements,
including changes from anticipated levels of sales, future national or regional
economic and competitive conditions, changes in relationships with
customers, access to capital, difficulties in developing and marketing new
products, marketing existing products, customer acceptance of existing and
new products, and other factors. Accordingly, although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, there can be no assurance that such expectations will prove to
be correct. The Company has no obligation to update the forward-looking
information contained in this presentation.
Corporate Profile
Leading manufacturer of air brake valves for commercial
vehicles in China
• Spin-off from Ruili Group which was established in 1987
• Revenue $47 million in 2004; $64 million in 2005
• Based in Wenzhou City, Zhejiang Province
– the “Hub of auto parts” in China
– major highway to reach Shanghai within 5 hours
• 1295 employees
Market Data and Valuation
Stock Price (Feb 10, 2006):
$5.75
Shares Outstanding:
13.5M
Shares in Float:
0.38M
Market Cap:
$76.48M
Enterprise Value (EV):
$87.56M
P/E (’05):
15.5x
P/B (‘05):
4.6x
PEG Ratio (’05):
0.5x
EV/Revenue (’05):
1.4x
EV/EBITDA (’05):
11.4x
Key Investment Highlights
• A fast-growing, profitable auto parts manufacturer in
coastal China
• No. 1 market share in China of the overall growth in the
Chinese auto industry
• Capitalize on its abilities to manufacture at
comparatively low costs to increase its international
export business
Industry Overview
• Auto penetration in China is currently at only 2%,
compared with the 50% -60% penetration in US, Europe,
and Japan.
• Already the world’s 2nd largest auto market after the
U.S. and surpassed Japan in 2005
• Chinese Auto part sales totaled at US$50bn in 2004,
expected to be $86 billion by 2010
• Domestic auto part market: US$40bn in 2004
• Growing export market: China vehicle and parts exports
to grow from US$10bn in 2004 to US$40bn in 2010 or
annual growth rate of 27%
Source: UBS, GM estimates, Zuosi Research, China Auto Association, company estimates
SORL Industry Leadership
• No. 1 market share (21%) in heavy-duty vehicle air brake
valves in China
• 18% share in the OEM air brake valve segment, ranked No.
1 in China: supplied to OEM customers such as FAW,
Dongfeng Motors and Beiqi Foton etc.
• 25% share in the replacement air brake
segment, ranked No. 1 in China
• Production in 2005: 7 million units
2005 Industry Summary
Passenger Vehicle: a volatile year that ended strongly
• Volume growth 24% YoY in 2005
• Auto maker Profit decline 41% YoY
• Revenue increase 13%
• Net margin drops from 6.8% to 4.2%
• 4Q2005 1Mil sedans sold and posted
a historical high
Truck market: growth reset with sustainable margin
• 04 truck volume sales was strong due to gov policy
• 04 volume growth 45% YoY
• Truck sales declined sharply in 2005: 36% YoY drop
• Gov new regulation, continued overloading crack-down
• $142 million Chinese heavy-duty vehicle air brake valve market in 2005
Source: Bear Stern Equity Research, Citigroup Equity Research, CAAM
Heavy Duty Truck Market
• Annual sales of heavy duty
trucks grow CAGR 51%
2000-2004
• Demand to grow 20% p.a.
during 2006-2010 to reach
700,000 per year
• High entry barriers with
government support
Heavy Duty Truck Sales in Volume
500,000
400,000
300,000
200,000
• Imports not as durable as local
model due to the harsh road
condition, lack of maintenance
and low repair skill at
local garages
100,000
• Export market grows steadily
Source: Citigroup Equity Research Sept 2005, CAAM, Credit Suisse Research Jan 2006
0
2003
2004
2005
2006
est
2007
est
2006 Industry Outlook
Passenger Vehicle: Auto shares around the world started well
• China became the main driver of Jan global sedan sales: 60% rise YoY
• Strong volume occurred without extensive price discount
• Analysts expect price cuts during new car launch season in April and May
to be more moderate
• Capacity is still expanding and demand for economy car remains robust
• Unanimous forecast of 20% volume growth by Wall Street equity analysts
Truck market: Infrastructure and regulation in favor of
continuous growth
• Heavy truck sales decline has bottomed and recovery could be in 2006
• Highway expansion by 38% during 2006-2010 (Chinese government 11th
“Five-Year Plan” Period)
• The Ministry of Construction plans to complete its massive network of
arterial national highways by 2008 prior to Beijing Olympics
• Trucks’ increasing role in solving logistic bottleneck
• Transition to Euro III standard likely boosts E2 truck sales ahead of 2007
Source: Citigroup Equity Research, CAAM, Frost & Sullivan Research - Sept 2005, Feb, 2006, Credit Suisse Research, Jan 2006
Competition Landscape
• Highly fragmented market with over 4,700 registered auto
component companies in China
• Customer relationship is the key; Price is not as sensitive as
passenger vehicles
• Major domestic competitors
– CAFF: state-owned enterprise, older facilities, higher cost
– Weiming: Sino-foreign JV, higher production cost and lower
performance-to-cost ratio
– VIE: fast-growing private company, no established aftermarket
sales network
• International competitors
– Wabco, Knorr: Both companies’ products primarily for European
and U.S. vehicles
– On average 2 times more expensive
Competitive Advantage
Strong Product
Portfolio
 High-quality and
continuous R&D
 40 categories and
800 specs
 Global
certifications:
ISO/TS16949
Extensive
Distribution
Solid Management
and Relationship
 27 authorized
distributors
covering 7 regions
 Industry-leading
management team
 Good relationship
with large auto
makers: FAW and
Dongfeng Motors
 Over 800 subdistributors
nationwide
 3 authorized sales
centers (Australia,
UAE, USA)
Major Products
Spring Brake
Chambers
Foot Brake
Valves
Four-circuit
Protection
Valves
Air Dryers
Clutch Servos
Parking Brake
Valves
Production
• 15 Production/Assembly lines
• State-of-the-art testing facilities
• 270,000 Sq feet production space
• Advanced equipments from US,
Korea and Taiwan
• ISO/TS16949 Quality Management System
• OHSAS18001 System
• ISO14001 Environmental
Management System
Research & Development
• Focus on development of new products :
– Clutch servo with inductive displacement transducer
– Automatic slack adjuster
– Loading sense proportion valve
– New Type Foot brake valve
– Transitioning to electronic controlled air brake valve products.
• 44 technical staff, including 32 engineers or senior engineers
• 1 patent, 2 licensed patents, 9 pending patent applications, a series
of Know-How’s.
• Partnerships with leading automotive engineering institutes:
– Beijing Jiaotong University
– Tsinghua University E-Tech Technology Co., Ltd
– Zhejiang University
– Huazhong University of Science and Technology
Balanced Revenue Sources
2005 Export Revenues Breakdown
OEM
32%
Replacement
32%
Asia
42%
Americas
25%
Export
36%
Australia
3%
Europe
15%
Africa
15%
Rev OEM $21M :: Aftermarket Replacement $20M :: Export $23M
Gross Margin OEM 22% :: Aftermarket 20% :: Export 25%
Customers: OEM
• 47% of revenue from OEMs in 2004, declined to 32% in 2005
as sales from other segments expanded
• Total 39 OEM manufacturers including all of key truck makers
in China
• Solid long-term relationships, with SORL’s five largest
customers (also top Chinese truck makers) accounting for
57% of total OEM sales in 2005
• Annual sales contracts are generally signed at the beginning
of the year with quarterly review
• Two largest customers, FAW and Dongfeng, accounted
for more than 53% of the Chinese total heavy duty truck
sales in 2005
Customers: OEM
SORL: The major supplier to the major truck
manufacturers in China
Auto Makers
FAW
Qingdao
FAW Jiefang
Changchun
Dongfeng
Motors
Liuzhou
Special Auto
China Nat’l
Heavy Duty
Truck Group
Heavy Duty
Trucks Output
(unit)
55,970
71,797
14,000
45,000
Market Share
in China
23.7%
30%
5.8%
31.6%
18%
50%
5%
% Valves
Supplied by
SORL
40%
22%
FAW Qingdao and FAW Jiefang Changchun are the only two heavy truck makers within FAW family
Customers: Aftermarket
• $12.2 Million in ‘04 to
$20.2 Million in ‘05
• 26% of revenue in 2004
to 32% of revenue in 2005
• 27 authorized distributors
• Over 800 sub-distributors
Customers: Aftermarket
Success factors to win in the intensified
aftermarket competition
Established
Nationwide
Sales
Network
Close
Relationship
with Big OEM
Manufacturers
PerformanceCost
Competitiveness
Warranty
and
Reliability
Timely
Delivery
Efficient
Customer
Services
Other Small
Manufacturers
No
No
Low
Low
Poor
Poor
SORL Auto
Parts
Yes
Yes
High
High
Good
Good
Customers: International
• $12.6 Million in ‘04
to $23.4 Million in ‘05
• 27% of rev in 2004
to 36% of rev in 2005
• Mostly replacement
but begin to explore
OEM opportunities:
TATA Motors
• 3 authorized sales
centers (Australia,
UAE and USA)
Customers: International
Top 7 export customers continue to show
confidence in SORL product quality
4,500,000
2004
2005
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
GD Auto
MICO
FP
MITA
POLMO
Air-Fren
KTC
Country:
UAE
South Africa
Canada
Taiwan
South Africa
Spain
USA
YoY
Increase:
92%
77%
93%
385%
140%
165%
10%
Attractive Export Opportunity
• Current commercial vehicle air brake valves market size
in the world: over $5 billion
• Growth of aftermarket air brake valves market:
approximately 15%
• Global purchase trend: moving to China
Cost Control
• Main raw materials: aluminum and steel
• Economies of scale production and production
technique optimization
• Down payment to suppliers to secure purchase price
in a rising market
• ISO/TS16949 quality assurance system to discipline
over 20 suppliers
• Closely monitored inventory management of other
raw materials
• Reduction in spoilage
Financial Highlights
Revenue Growth
Net Income Growth
($millions)
($millions)
64.2
5.0
4.8
46.8
33.1
1.2
2003
2004
2005
2003
2004
2005
• 39% CAGR of sales during 2003-2005
• 2006 sales from new products projected to increase to 18% of revenue
• 2006 export to reach 40% of revenue, up from 18% in 2003
and 36% in 2005
Growth Strategy
OEM:
• Enhance brand recognition and develop relationship with other truck
makers; cautiously explore opportunities in passenger vehicle domain
Export:
• Strengthen presence overseas by establishing relationships with additional
authorized distributors
M&A and JV:
• Wenzhou is one of most active private economies in China
• Well known for its auto parts specialty in the nation
• Over 1400 auto parts companies can become potential M&A or JV targets
Cost Control:
• Reduce material and energy consumption; strict measurement on waste
• Maintain high standard quality control
Management Team
Xiaoping Zhang, Chairman and CEO
Xiaofeng Zhang, COO
• Co-founder of Ruili Group
• Co-founder of Ruili Group
• President of the Ruian Auto Parts
Association in Wenzhou, Zhejiang
Province
• Spearheads SORL’s sales and
marketing effort
• Vice President of China Federation
of Industry and Commerce Auto &
Motorbike Parts Chamber of
Commerce
Zongyun Zhou, CFO
• Certified Public Accountant in China
• Chief Financial Officer of Shanghai
Huhao Auto Parts Manufacturing
Company Limited, a joint venture
between the Ruili Group and
Shanghai Auto Group, 2002 - 2004
• General Manager of Ruili Group
until 2004
David He, Senior Manager of
Investor Relations
• Illinois CPA and awarded CFA
designation
• Senior Relationship Manager in
corporate banking with Credit
Agricole Indosuez in Shanghai for
7 years
Summary
• Maintained the No. 1 market share in the Chinese
heavy-duty vehicle air brake valve sector
• Projected CAGR of 30% and 27% in sales and earnings
from 2005-2008
• Globally recognized ISO/TS16949 certification, highquality products and rapidly growing export sales
• Heavy-duty vehicle market, driven by China’s rapid
economic growth and mass construction, gives SORL a
solid ongoing sales base
• Attractive growth opportunities through expansion into
international market & domestic sedan market
Investor Contact
David Ming He
Senior Manager, Investor Relations
Phone:
+86 (577) 6581 7720
Fax:
+86 (577) 6581 7733
Email:
davidhe@sorl.com.cn
Web:
www.sorl-autoparts.com