There has been a recent frenzy in China Zenix Auto International Ltd (NYSE:ZX).
Unprecedented volumes have driven up the share price to a 3-month high to August 2017 levels putting the prolonged share price consolidation to a definite end.
Moreover, the increased volatility in ZX share price, led investors to ask why.
The share price action can be seen below:
If you are one of the investors with this question in mind, we have got you. This article will explain the recent development and link it to the company fundamentals and market sentiments.
Here, is a synopsis of who ZX are for a start.
Founded in 2003, China Zenix Auto International Limited is an auto parts exporter based in Zhangzhou, China.
The company started operations in 2000 as Richwheel Limited and later in 2010 changed names to be known as Zenix Auto International. Zenix has taken a niche in manufacturing, distribution, export and sale of aluminum wheels and wheel components globally.
It currently has 6 manufacturing bases across China each specializing in delivering key components to make the final products.
Industry and Statistics
The industry itself has realized an annual growth of 12% per annum from 2012 to 2017, driven by high demand. At the end of March 2017, the total number of Automobiles in use in China was about 200 million, which translates to about one car per adult in the U.S.
Auto Part Industry in China is classified as medium capital intensive- as most of the capital is invested in capacity building rather than operations. However, the traditional industry is manufacturing and its known significant outlays are required for large-scale production in order to gain from economies of scale.
The future looks bright for China automotive parts manufacturing industry, with a $675 billion revenue pie to split amongst the successful companies. However, success does not come that easy unless companies are keen on and strategize around the following key success factors:
- Successful Industrial relations policy.
- Efficient and extensive distribution and collection network.
- Research and development in improvement of processes and technical skills.
ZX: The Company
The company is reaping the fruits from improving its distribution networks. Now what is left is to sell more of their product, and gain more. Can Zenix Auto achieve this in the near future?
One word, Yes.
The company has a wide product base that can capture many consumer segments across China and the world. In perspective, this translates to more than 644 car model types. The model types range from Heavy duty trucks to Mini-trucks.
The company is also reputable and has become synonymous with quality. This has been expressed across the value chain of the market from manufacturing to distribution. The company has won awards for its outstanding commitment to quality and gained customer recognition. The awards speak to their outstanding performance across the value chain. Strategizing on up-keeping and improving key industry relations will benefit Zenix Auto in the future and as stated above, is one of the key success factors in the automotive industry. Some of its major partners in its supply networks are heavy weight automakers such as TATA and FOTON. Solidifying their commitment towards quality has been unwavering outlays geared towards Research and Development by Zenix Auto. Research and development costs accounted for more than 25% of the operating costs in 2016. As a result, the company had over 100 patents to its name as at 2015.
The end to end manufacturing process to make wheel parts and to scale it up is still costly. This will remain a major barrier to entry to the industry. What is now seen as losses are the growing pains required to gain breakthroughs in the manufacturing process and we reckon the company will soon be in the green supported by strong fundamentals. It seems the market has captured this and is optimistic about the stock and prospective earnings for this year and hence the recent sharp rise in the buying of the stock recently.
Zenix Auto strategy in developing their international market, is the next stage in building upon the success in making the product right and capture more of the growing global automotive market. Strong cash-flows will be required to finance customer acquisition and access the extra needed capital. Management will need to harmonize their supply chain to improve their cash position and reduce the volatility in their working capital as witnessed in the past. Capital expenditures will remain key but look to be stable in the future.
Management has a proven track-record with rich and varied experience in their respective fields and seem keen on steering innovation in their products and processes. Time will prove to be a testament to their success in adopting the right approach in an intensive industry such as manufacturing.
The most recent quarter saw a jump in their revenues from $97 million to $113 million, a significant leap for them of nearly 17%. However, there seemed to be a decline in the efficiency in their distribution processes as the gross profit margins fell 18% during the same quarter courtesy of the increase in costs of goods sold.
They went further to make losses of over $3 million this quarter despite the impeccable revenue surge, however, making $23 million in operating cash flows.
The above, though not all positive, gives us a glimmer of hope that ZX will jump back up going forward.
The strong revenue position has been improving and keeps going upwards, a strength for them. Coupled with their positive cash flows, the story above is significant of ZX: a company knocked (due to losses) but not out.
ZX has put a lot of money into investment in the automobile sector. Such high amounts are bound to payoff. Despite the loss in this quarter, the next seems even better for them given the recent moves management has made. We expect better times therefore higher returns.
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Disclosure: We have no position in ZX and have not been compensated for this article.