Wonder Auto Buys Parts Maker

Wonder Auto Technology (WATG - Analyst Report) said that its subsidiary, Jinzhou Wanyou Mechanical Parts, recently acquired Hong Kong-based Friend Birch Ltd. for $12 million. Friend Birch designs, manufactures and markets automotive springs, gas springs, gas spring shafts and other thin mechanical shaft products. It has a substantial customer base in Chinese and European original equipment manufacturer and after markets.

The acquisition included Friend Birch's rods and shafts technology development center, technologies and patents and two wholly-owned units, which produce automotive mechanical springs, gas springs, gas spring rods and shafts.

Wonder Auto expects the acquisition to boost its production capacity for rods and shafts by about 5 million. It will raise also the company’s net income by $2 million over the next 12 months.

The Liaoning, China-based manufacturer of automotive electrical parts, suspension products and engine accessories is likely to grow through acquisitions. Its purchase of Jinzhou Wanyou Mechanical Parts Co. diversified Wonder Auto’s product offerings and increased export sales.

Its Jinzhou Hanhua and Jinzhou Karham buyouts last year are further expected to reduce cost of raw materials and components. This is because Wonder Auto has absorbed administrative costs without a rise in sales revenue, as both the companies acquired had been its suppliers.

Wonder Auto’s acquisition of 65% interest in Jinan Worldwide Auto Parts (JWAA) – the largest engine valve and tappet manufacturer in China – in 2008 also opened up the Chinese diesel engine market (JWAA’s main market) for the company.

We recommend the shares of Wonder Auto as Neutral with a target price of $11.