Q3 impressive financial report did not prevent the stock price from falling for the third consecutive time. What happened to China Automotive Systems, Inc. (CAAS.US)?

On August 13th this year, before the market opened, China Automotive Systems, Inc. (CAAS.US) disclosed its 2024 Q2 financial report, showing a 15.4% year-on-year increase in revenue for the period. The company's management also reaffirmed its full-year revenue expectation of $605 million for 2024. Encouraged by this financial report, the stock price of China Automotive Systems, Inc. rose by 5.29%. As of November 13th, China Automotive Systems, Inc. disclosed its Q3 financial report before the market opened, showing a 19.4% year-on-year increase in revenue for the period. At the same time, the company's management also raised its full-year revenue guidance to $630 million. However, despite this improved financial performance, the stock market's reaction before and after has been completely opposite. Is it like boiling a frog in warm water? After the Q3 financial report, China Automotive Systems, Inc. stock price dropped for two consecutive days on November 13th and 14th, with decreases of 4.55% and 3.63% respectively. The stock price trend diverged from the fundamentals, which is clearly not a positive signal. Looking at the stock price trend since October, after a surge in late September, China Automotive Systems, Inc. began a corrective trend in early October, stabilizing and rebounding around October 23rd. However, investors can clearly see a difference in the volume and price performance between the late September and late October upward trends. At the end of September, after the stock price of China Automotive Systems, Inc. started to rise, the trading volume nearly steadily increased daily, from 50,800 shares on September 20th to 440,800 shares on September 30th. However, in the late October market, the trading volume of China Automotive Systems, Inc. only increased daily from October 24th to 28th, and then during the fluctuating upward trend from October 30th to November 11th, the volume significantly shrank. For instance, from November 5th to 8th, as the company's stock price rose from a low of $4.47 to a high of $4.79, the corresponding trading volume decreased from 95,200 shares to 31,200 shares. During the "three consecutive drops" on November 12th to 14th, the corresponding trading volume also dropped from 74,200 shares to 34,200 shares. It can be seen that during the stabilizing and corrective trend in late October, China Automotive Systems, Inc. showed signals of "decreasing volume increase" and "decreasing volume decrease". These signals may be the reasons behind the divergence between its stock price trend and fundamentals. From a valuation perspective, after the significant rise in late September, China Automotive Systems, Inc.'s overall PB ratio is above the historical average, starting to run above the reasonable range. The current Price to Book ratio is 0.37 times, exceeding historical data by 70%. Looking at the chip distribution chart, comparing the situations on November 7th and November 14th, during the late October market of China Automotive Systems, Inc., due to the low point of the previous stock price correction not reaching the average chip cost of $3.92, the overall chip cleaning effect was poor. Additionally, the correction attracted some bottom-fishing short-term funds, leading to a significant profit-taking zone and a large amount of profitable chips, with a profit-taking ratio as high as 97.65%. Therefore, by the end of October, the entrance funds for China Automotive Systems, Inc. were already in consensus about the risks at the top and the future trends. Funds actively reduced their entry, and the phenomenon of no volume surge at the high point and volume-price divergence was a sign of a peak. Usually, after a company discloses its financial report, institutional funds in the market will choose to sell in large volumes. However, the performance of China Automotive Systems, Inc. is just the opposite. It is understood that although a decrease in trading volume often means a weakening of selling pressure, to some extent it is a normal price-volume relationship. However, under the premise of previous cumulative gains, institutional funds may slow down their selling by using the momentum of the market, which is called "boiling the frog in warm water". The prosperity depends on the downstream situation Whether it is a high-level decrease in trading volume or the double peak distribution shown on the chip distribution chart, it indicates that the recent pullback of China Automotive Systems, Inc. is unlikely to reverse in the short term. However, looking at a longer timeline, this is just a valuation adjustment process supported by fundamentals. Compared to the steady rise of the NASDAQ this year, the stock price of China Automotive Systems, Inc. has shown more explosive performance. Looking at the trend chart, the stock price of China Automotive Systems, Inc. was mostly below the NASDAQ in the first half of the year, but starting from the end of June, the stock price surged significantly and reached a maximum increase of 74.35% in late September. It can be seen that the stock price of China Automotive Systems, Inc. has been fluctuating but overall in an upward trend this year. Based on the latest disclosed Q3 financial report, the company achieved a 19.4% year-on-year increase in revenue for the period, reaching $164 million; net profit attributable to common stockholders was $5.5 million; gross profit for the period increased by 6.5% year-on-year to $26.4 million, with a gross margin of 16.0%. As mentioned earlier, in the third quarter of this year, China Automotive Systems, Inc. achieved further revenue growth compared to the previous quarter and raised full-year performance guidance, mainly due to the increase in sales of its passenger car EPS.Long.From the perspective of the market, according to the "Intelligent Electric Chassis Technology Roadmap" released by the Electric Vehicle Alliance, the development goals of passenger car steer-by-wire systems are as follows: by 2025, the steer-by-wire system for L3+ level automated driving should lead internationally, core components for L3+ level should have independent design capabilities and enter small-scale trial installation phase, and the penetration rate of steer-by-wire systems should reach 5%. By 2030, the steer-by-wire system for L4+ level automated driving should lead internationally, core components for L4+ level should have independent design capabilities and enter small-scale trial installation phase, and the penetration rate of steer-by-wire systems should reach 30%. However, at present, steer-by-wire systems have not been widely popularized, and redundant EPS remains the core technology in the current L3+ automated driving scenarios. Compared to traditional non-redundant EPS, redundant EPS requires more complex system architecture and functionality to ensure the safety, reliability, and driving experience of vehicles, hence, there are higher technological barriers. As a result, the corresponding EPS market size is growing substantially. According to data from BCG, the global automotive EPS market size reached 261.534 billion yuan in 2023, with the market size in China reaching 96.454 billion yuan. It is worth mentioning that EPS penetration in the passenger car market is close to its peak. According to QYResearch data, in terms of global downstream applications of EPS, passenger cars are the largest downstream market, accounting for 91.5% of the market share. In the Chinese passenger car steering system market, the penetration rate of EPS in the Chinese passenger car market was approximately 96.5%, 97.6%, and 98.8% in 2020-2022, essentially approaching its peak. In terms of market structure, global EPS manufacturers mainly include JTEKT, Bosch, NEXTEER, ZF Friedrichshafen, and Precision, among others. According to QYResearch data, the top five manufacturers accounted for 80% of the market share in 2022, with JTEKT being the largest manufacturer, capturing 30% of the market share. In comparison, the market share of domestic EPS suppliers is relatively small, but there is significant room for domestic substitution. According to the financial disclosure data of China Automotive Systems, Inc., in 2023, the company increased its sales efforts in China, resulting in the proportion of sales in the Chinese region to the company's revenue further rising to 65.1%. In fact, the growth performance of China Automotive Systems, Inc. and even the entire EPS components industry mainly comes from the booming downstream passenger car market in China. Taking the financial report for the first half of 2024 from industry-leading company NEXTEER as an example, in the first half of this year, NEXTEER witnessed rapid growth in the Asia-Pacific market, with approximately 38 projects launched in the first half of 2024, of which 23 came from the Asia-Pacific region, driving NEXTEER's revenue in the Asia-Pacific region to grow by 27.5% year-on-year to $595 million; in terms of orders, NEXTEER secured orders of $2.1 billion in the first half of 2024, with orders from Chinese OEMs accounting for as much as 43%, nearly three times the size of the same period in 2023. Thanks to the recovery in domestic downstream passenger car sales in recent years, there has been an incremental market for the automotive steering industry. Compared to domestic peers, China Automotive Systems, Inc. has a size and cost advantage that gives it a certain leading position in domestic substitution for EPS, making it more likely to attract market attention when the downstream boom arrives.