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SORL - SORL Auto Parts, Inc


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SORL Auto Parts is a chinese based company that manufactures and distributes automotive break systems in two segments: Commercial vehicle brake system, such as buses and trucks and passenger vehicle brake system. SORL sells its products in about 104 countries and regions.

 

Highlights

 

-$40M in market capitalization, and $70M in cash and cash investments.

-Very modest levels of debt.

-NCAV of approximately $8, versus current trading price of $2.

- Company has physical locations in United States.

- They are being audited by an accounting firm called Malone Bailey, which is known for auditing chinese companies and resigning from companies that don't have clean accounting numbers.

- According to my back of the hand DCF calculation, intrinsic value for company is around $10

- Gabelli funds own about 200,000 shares of the company

 

Negatives/ uncertainties

- Management is not buying back shares or issuing dividends

- As with a lot of chinese companies, management is not astute at capital allocation

- Unlocking of fundamental value could depend upon a major/ mid-tier investment bank bringing the company to light

 

 

 

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They have around 18.1M in "short term loans"

 

In the first six months of this year, they they took out nearly 25M in new loans.

 

In the same period they added a little shy of 24M to their "short term investments". These investments don't seem to be yielding very much...

 

What has the company communicated about the economic purpose of this activity? If they've said nothing, I'd be very concerned. These aren't small movements of capital for a 40M dollar company.

 

It feels like "not astute at capital allocation" may be the most bullish possible interpretation.

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They have around 18.1M in "short term loans"

 

In the first six months of this year, they they took out nearly 25M in new loans.

 

In the same period they added a little shy of 24M to their "short term investments". These investments don't seem to be yielding very much...

 

What has the company communicated about the economic purpose of this activity? If they've said nothing, I'd be very concerned. These aren't small movements of capital for a 40M dollar company.

 

It feels like "not astute at capital allocation" may be the most bullish possible interpretation.

 

I think you are right to raise this. So let's look at the data:

Per their 10-q http://www.sec.gov/Archives/edgar/data/714284/000114420415049893/v417658_10q.htm :

 

For the three months ended June 30, 2015 and 2014, the interest expenses for short-term bank loans were $134,430 and $176,710, respectively.

 

... and later:

 

The interest income for the three months ended June 30, 2015, increased by $361,001 to $409,836 from $48,835 for the same period of 2014, mainly due to increased short term investments during the period.

 

The loans are:

short term loans from Bank of China, Bank of Ningbo, China Construction Bank, OCBC Bank and Agricultural Bank of China, respectively, to finance general working capital as well as new equipment acquisition. Interest rate for the loans ranged from 0.32% to 5.35% per annum. The maturity dates of the loans, as extended, ranged from September 16, 2015 to May 14, 2016

 

They seem to be collecting (360k-134k)*4=~900k/yr, (although perhaps on different amounts borrowed vs invested) while btw personally guaranteeing the loans by controlling shareholder/related party, which does not seem like an astute way to try to steal/defraud. Does this add up to some capital allocation smoking gun?

 

Given the interest expenses reduction, seems they are rolling the loans on attractive terms.

China term deposit rates seem to be about 2-2.5%.

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My biggest concern with the company is the fact that chinese companies aren't good at capital allocation at all. It could be for a variety of factors, the biggest one in my opinion is that I don't think they  learn enough about finance/capital allocation in chinese universities. I would love to get the input of someone who's more intimate with the chinese business school system

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My biggest concern with the company is the fact that chinese companies aren't good at capital allocation at all. It could be for a variety of factors, the biggest one in my opinion is that I don't think they  learn enough about finance/capital allocation in chinese universities. I would love to get the input of someone who's more intimate with the chinese business school system

 

My biggest concern is that the company is faking its cash balance. Net net Chinese company that's too good to be true.

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My biggest concern with the company is the fact that chinese companies aren't good at capital allocation at all. It could be for a variety of factors, the biggest one in my opinion is that I don't think they  learn enough about finance/capital allocation in chinese universities. I would love to get the input of someone who's more intimate with the chinese business school system

 

My biggest concern is that the company is faking its cash balance. Net net Chinese company that's too good to be true.

I don't think they are. They have been audited since July 18,2013 by Malone Bailey,a well known firm for auditing and resigning from several chinese company frauds.

Their prior auditors don't seem to think that it's a fraud too.As per their previous auditors statement:

 

"Item 4.01 Changes in Registrant’s Certifying Accountant

 

On July 1, 2013 (the “Resignation Date”), EFP Rotenberg, LLP (“EFP”) resigned as the principal independent registered public accountant of Sorl Auto Parts, Inc. (the “Company”).

 

The report of EFP on the Company’s financial statements for the years ended December 31, 2011 and 2012 did not contain adverse opinions or disclaimers of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

For the years ended December 31, 2011 and 2012 and the subsequent interim period through July 1, 2013, there were no disagreements between the Company and EFP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to EFP’s satisfaction, would have caused them to make reference to the subject matter of the disagreements in connection with its report. For the years ended December 31, 2011 and 2012 and the subsequent interim period through July 1, 2013, there were no "reportable events" as that term is described in Item 304(a)(1)(v) of Regulation S-K.

 

The Company requested that EFP review the disclosures contained herein and asked EFP to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements the Company made in this Current Report and, if not, stating the respects in which it does not agree. A copy of EFP’s letter dated July 1, 2013 is filed as Exhibit 16.1 to this Form 8-K"

Their auditors response:

"July 1, 2013

 

Securities and Exchange Commission

100 F Street N.E.

Washington, D.C. 20549

 

We have been furnished with a copy of the response to Item 4.01 of Form 8-K for the event that occurred on July 1, 2013, to be filed by our former client, Sorl Auto Parts, Inc. We agree with the statements made in response to that Item insofar as they relate to our Firm.

 

Very truly yours,

 

 

 

EFP Rotenberg, LLP"

 

It doesn't look that they're hiding anything, but you never know

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- They are being audited by an accounting firm called Malone Bailey, which is known for auditing chinese companies and resigning from companies that don't have clean accounting numbers.

 

That's a negative.  You should really stay away from this stock because of that.

Why is that a negative? They chose Malone Bailey as their auditor

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I can't believe you think VRX(they definitely have their problems though) is a fraud, but you put this forward as an investing idea. I just love this. You have a company(all rough/rounded numbers from yahoo finance) that has like 200M in assets net of liabilities, 237 M in revenue, 22.5M in op cash flow, all with a 41M market cap. Those are just ridiculous numbers that make for ridiculous metrics.  You think the company isn't fraudulent. How could anyone not buyback shares at those prices? Obviously they don't believe the numbers either, or they just hate shareholders. I don't believe anyone is that bad at capital allocation. It doesn't even take business sense to see that getting  $70(plus assets, plus a profitable business) for $40 is a deal of a lifetime. A 12 year old could see that is a great deal, but apparently the Chinese management that can make and run a large profitable business has no clue that their company is cheap. 

 

Yeah, its a fraud. As ItsAValueTrap has alluded to, most accounting firms don't have to walk away from lots of Chinese frauds because they wouldn't get approached or wouldn't accept auditing them in the first place. That this firm has had to walk away from frauds doesn't look good on them at all.

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In grad school at Caltech, I played a game of Monopoly with a group of Chinese nationals.  From that game, I learned that some Chinese can be clueless about some financial details we consider obvious -- even if they are extremely intelligent and educated.  That game of Monopoly helped me understand a bunch of bizarre things I see the Chinese do.  I don't know if SORL is a fraud (I haven't looked at it), but it is still possible they don't know they should buy back shares.

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In grad school at Caltech, I played a game of Monopoly with a group of Chinese nationals.  From that game, I learned that some Chinese can be clueless about some financial details we consider obvious -- even if they are extremely intelligent and educated.  That game of Monopoly helped me understand a bunch of bizarre things I see the Chinese do.  I don't know if SORL is a fraud (I haven't looked at it), but it is still possible they don't know they should buy back shares.

 

Yes, quite honestly I don't think they know they are supposed to buy back shares. They don't even have a CFO and top management doesn't have financial experience

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I can't believe you think VRX(they definitely have their problems though) is a fraud, but you put this forward as an investing idea. I just love this. You have a company(all rough/rounded numbers from yahoo finance) that has like 200M in assets net of liabilities, 237 M in revenue, 22.5M in op cash flow, all with a 41M market cap. Those are just ridiculous numbers that make for ridiculous metrics.  You think the company isn't fraudulent. How could anyone not buyback shares at those prices? Obviously they don't believe the numbers either, or they just hate shareholders. I don't believe anyone is that bad at capital allocation. It doesn't even take business sense to see that getting  $70(plus assets, plus a profitable business) for $40 is a deal of a lifetime. A 12 year old could see that is a great deal, but apparently the Chinese management that can make and run a large profitable business has no clue that their company is cheap. 

 

Yeah, its a fraud. As ItsAValueTrap has alluded to, most accounting firms don't have to walk away from lots of Chinese frauds because they wouldn't get approached or wouldn't accept auditing them in the first place. That this firm has had to walk away from frauds doesn't look good on them at all.

No, it is not a fraud. What would lead you to believe that? As I said, chinese managements are not exactly financial wizards- if this was a company run by western management, they would have bought back shares by now. I don't think chinese managements are even aware of share buybacks

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I can't believe you think VRX(they definitely have their problems though) is a fraud, but you put this forward as an investing idea. I just love this. You have a company(all rough/rounded numbers from yahoo finance) that has like 200M in assets net of liabilities, 237 M in revenue, 22.5M in op cash flow, all with a 41M market cap. Those are just ridiculous numbers that make for ridiculous metrics.  You think the company isn't fraudulent. How could anyone not buyback shares at those prices? Obviously they don't believe the numbers either, or they just hate shareholders. I don't believe anyone is that bad at capital allocation. It doesn't even take business sense to see that getting  $70(plus assets, plus a profitable business) for $40 is a deal of a lifetime. A 12 year old could see that is a great deal, but apparently the Chinese management that can make and run a large profitable business has no clue that their company is cheap. 

 

Yeah, its a fraud. As ItsAValueTrap has alluded to, most accounting firms don't have to walk away from lots of Chinese frauds because they wouldn't get approached or wouldn't accept auditing them in the first place. That this firm has had to walk away from frauds doesn't look good on them at all.

No, it is not a fraud. What would lead you to believe that? As I said, chinese managements are not exactly financial wizards- if this was a company run by western management, they would have bought back shares by now. I don't think chinese managements are even aware of share buybacks

 

The deal with net nets is usually you need to have some certainty over the cash eventually being paid out. Else, even if it is not a fraud, it will trade at a discount always. Buffet had a quote about being sure about the number of birds in a bush and also reasonable estimate of when they will come out.

 

You say the management is so inept that they aren't aware of share buybacks. If that's true, what makes you think the birds in this bush will ever come out? That is if there are real birds in there....

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I can't believe you think VRX(they definitely have their problems though) is a fraud, but you put this forward as an investing idea. I just love this. You have a company(all rough/rounded numbers from yahoo finance) that has like 200M in assets net of liabilities, 237 M in revenue, 22.5M in op cash flow, all with a 41M market cap. Those are just ridiculous numbers that make for ridiculous metrics.  You think the company isn't fraudulent. How could anyone not buyback shares at those prices? Obviously they don't believe the numbers either, or they just hate shareholders. I don't believe anyone is that bad at capital allocation. It doesn't even take business sense to see that getting  $70(plus assets, plus a profitable business) for $40 is a deal of a lifetime. A 12 year old could see that is a great deal, but apparently the Chinese management that can make and run a large profitable business has no clue that their company is cheap. 

 

Yeah, its a fraud. As ItsAValueTrap has alluded to, most accounting firms don't have to walk away from lots of Chinese frauds because they wouldn't get approached or wouldn't accept auditing them in the first place. That this firm has had to walk away from frauds doesn't look good on them at all.

No, it is not a fraud. What would lead you to believe that? As I said, chinese managements are not exactly financial wizards- if this was a company run by western management, they would have bought back shares by now. I don't think chinese managements are even aware of share buybacks

 

The deal with net nets is usually you need to have some certainty over the cash eventually being paid out. Else, even if it is not a fraud, it will trade at a discount always. Buffet had a quote about being sure about the number of birds in a bush and also reasonable estimate of when they will come out.

 

You say the management is so inept that they aren't aware of share buybacks. If that's true, what makes you think the birds in this bush will ever come out? That is if there are real birds in there....

I cannot say with absolute certainty that intrinsic value will be materialized, but there is a good possibility that it will, as it has in the past.With that being said, there might be a long time for the bird in the bush to come out-that is the reason why I have invested only a negligible amount of money in the company.

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The last concall had a discussion on buybacks, etc.

 

http://seekingalpha.com/article/3441106-sorl-auto-parts-inc-sorl-q2-2015-results-earnings-call-transcript?part=single

 

So they are aware of buybacks and also have thought about things like going private, relisting in China and dividends, and say they are watching and thinking about things.

 

It's such a cheap stock and one of the big investment firms went and visited their plants about 5 years ago and found it to be a legit factory, etc., so I do own, but a small position for me as well due to the concerns mentioned prevously.

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The last concall had a discussion on buybacks, etc.

 

http://seekingalpha.com/article/3441106-sorl-auto-parts-inc-sorl-q2-2015-results-earnings-call-transcript?part=single

 

So they are aware of buybacks and also have thought about things like going private, relisting in China and dividends, and say they are watching and thinking about things.

 

It's such a cheap stock and one of the big investment firms went and visited their plants about 5 years ago and found it to be a legit factory, etc., so I do own, but a small position for me as well due to the concerns mentioned prevously.

Exactly, I own a pretty small position. I regard this as a reasonable probabilistic candidate for reversion to the mean

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  • 2 weeks later...

The last concall had a discussion on buybacks, etc.

 

http://seekingalpha.com/article/3441106-sorl-auto-parts-inc-sorl-q2-2015-results-earnings-call-transcript?part=single

 

So they are aware of buybacks and also have thought about things like going private, relisting in China and dividends, and say they are watching and thinking about things.

 

It's such a cheap stock and one of the big investment firms went and visited their plants about 5 years ago and found it to be a legit factory, etc., so I do own, but a small position for me as well due to the concerns mentioned prevously.

Exactly, I own a pretty small position. I regard this as a reasonable probabilistic candidate for reversion to the mean

 

It's attempting to revert to way below the mean -- specifically, $2.84/share:

https://www.morningstar.com/news/pr-news-wire/PRNews_20151030CN44287/sorl-auto-parts-announces-receipt-of-a-preliminary-nonbinding-proposal-to-acquire-the-company.html

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The last concall had a discussion on buybacks, etc.

 

http://seekingalpha.com/article/3441106-sorl-auto-parts-inc-sorl-q2-2015-results-earnings-call-transcript?part=single

 

So they are aware of buybacks and also have thought about things like going private, relisting in China and dividends, and say they are watching and thinking about things.

 

It's such a cheap stock and one of the big investment firms went and visited their plants about 5 years ago and found it to be a legit factory, etc., so I do own, but a small position for me as well due to the concerns mentioned prevously.

Exactly, I own a pretty small position. I regard this as a reasonable probabilistic candidate for reversion to the mean

 

It's attempting to revert to way below the mean -- specifically, $2.84/share:

https://www.morningstar.com/news/pr-news-wire/PRNews_20151030CN44287/sorl-auto-parts-announces-receipt-of-a-preliminary-nonbinding-proposal-to-acquire-the-company.html

I don't think the offer is serious.It seems to me that it's done to prop up the price of the stock.

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  • 2 months later...

Any news on this one? I haven't looked into it since I'm a bit cautious w/ chinese net-nets. But I think there are a few decent ones out there (like DSWL) so I do not automatically put them in the "too hard"- or "fraud"-pile.

 

 

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I can't believe you think VRX(they definitely have their problems though) is a fraud, but you put this forward as an investing idea. I just love this. You have a company(all rough/rounded numbers from yahoo finance) that has like 200M in assets net of liabilities, 237 M in revenue, 22.5M in op cash flow, all with a 41M market cap. Those are just ridiculous numbers that make for ridiculous metrics.  You think the company isn't fraudulent. How could anyone not buyback shares at those prices? Obviously they don't believe the numbers either, or they just hate shareholders. I don't believe anyone is that bad at capital allocation. It doesn't even take business sense to see that getting  $70(plus assets, plus a profitable business) for $40 is a deal of a lifetime. A 12 year old could see that is a great deal, but apparently the Chinese management that can make and run a large profitable business has no clue that their company is cheap. 

 

Yeah, its a fraud. As ItsAValueTrap has alluded to, most accounting firms don't have to walk away from lots of Chinese frauds because they wouldn't get approached or wouldn't accept auditing them in the first place. That this firm has had to walk away from frauds doesn't look good on them at all.

No, it is not a fraud. What would lead you to believe that? As I said, chinese managements are not exactly financial wizards- if this was a company run by western management, they would have bought back shares by now. I don't think chinese managements are even aware of share buybacks

I think most Chinese management teams have an excellent idea of capital allocation. They just use their wizardry to line their own pockets...
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The actual settlement for DYP hangs on my wall above my study area to remind me not to waste time on crap like this. AXP is at 10x earnings and MCO is at 12.5x EBT. You don't have to climb Everest to get decent returns.

DYP_Settlement_Notice.jpg.12d7f57c20349cb6570da0b975576535.jpg

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  • 1 year later...

UPDATE!

 

On May 5, 2016, through its principal operating subsidiary, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the Ruili Group, a related party under common control, pursuant to which the Company agreed to purchase the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China (the “Development Zone Facility”). In exchange for the Development Zone Facility, the Company agreed to transfer to the Ruili Group the land use rights and factory facilities of the Dongshan Facility owned by the company, plus RMB501,000,000 (approximately $76,533,000) in cash.

 

The cash consideration in the amount of RMB481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB20,000,000 (approximately $3,016,000) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use rights as specified in the Purchase Agreement. As of the filing date, the Company has not obtained the land use right certificate nor the property ownership certificate of the Development Zone Facility.

 

Well this at the very least shuts down my earlier intimation that the cash didn't actually exist.

 

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  • 2 years later...

Hmm any idea why SORL is trading at a relatively decent spread against the go pte offer? Approvals required seems limited. Looks low ball-ish but there's no large SH out there to block it from what I can tell? Or is it due to the Chinese factor? Curious to hear any thoughts on this.

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