Growth for China's Wonder Auto

Wonder Auto Technology, Inc. (WATG) enjoys a strong market share in alternators and starters in China and is strategically positioned in the faster-growing sub-segments in these markets.

The acquisitions of Jinzhou Hanhua and Jinzhou Karham are expected to reduce the cost of raw materials and components. However, weak product pricing, high customer concentration and a low tax rate force us to rate the stock a Hold with a target of $8.00.

Wonder Auto has a strong share of 14.6% in a growing market. Besides expanding in the fast-growing Chinese market, the company is formulating plans to capitalize on an emerging export market opportunity. After the WTO entry, the automobile demand in China has grown 10-15% annually. The company has the potential to grow globally. Recently, the company developed 12 new models of starters and alternators for small engine automobiles ranging from 1.2 to 2.5 liter displacement.

Wonder Auto will supply approximately 800,000 automotive alternators worth $32 million to a Shanghai-registered auto parts procurement centre over the next three years. Wonder Auto also signed a long-term supply agreement with a major European tier one auto parts producer, running through to 2011, with approximately $10 million in committed annual sales. In 2008, the management anticipates total sales revenue to rise 37% from the previous year to $140 million. Net income is expected to be $20 million, up 43% year over year.

Weak Economy Impacting Pactiv

Pactiv Corporation (PTV) reported first quarter EPS of $0.33, in line with our expectations but down 23.3% y-o-y, due to an unfavorable spread as a result of strong increases in resin costs. Food packaging organic volume also remains weak amid sluggish market conditions and additional price hikes pose a risk of loss of market share.

However, acquisitions (mainly Prairie Packaging, Inc.), price hikes implemented in Q108 and share buybacks will support profitability. Moreover, as part of its cost-containment efforts, the company commenced a restructuring program in this year, involving consolidation of two small facilities, asset rationalization and some headcount reduction. Thus, we maintain our Hold recommendation on shares of PTV.

There are several factors positively impacting operations of PTV, including continued sales momentum mainly in the consumer products division and cost-containment efforts. During the first quarter, consumer products sales grew 17.4% y-o-y, primarily driven by the Prairie acquisition, as well as volume growth in most product lines.

In Q108, operating margin fell 370 bps y-o-y to 11.5% due to resin cost increases, as price increases to offset higher resin costs in the Consumer segment were not effective until mid-March.