Asian Automobiles

Slightly off topic but automobiles are related to petroleum. UBS had a research report this morning "UBS High Yield Automotive Quarterly: Shock Waves Shake Detroit To It's Core."

Pat McCarthy, formerly of CRT, writes the following:

Extremely difficult to call the bottom for the Big3 and its Suppliers: While it seems like a "perfect storm" hits Detroit every 10 years or so, the one the industry is heading into now could end up being the most severe in history when all is said and done. ...

GM financing is widely anticipated by the market: We believe GM needs to raise upwards of $10 billion via new bank debt, a convertible bond issuance and possibly private equity in order to bolster it's liquidity to weather this storm and fund it's restructuring efforts. If GM accomplishes this in a relatively efficient manner, we think the market will breathe easier and we might see some support for automotive companies in the equity and credit markets. Conversely, a poor execution, with poor pricing, highly restrictive terms and a possible shortfall versus its targeted fundraising may very well reprice the sector wider.

It was with this report in mind that I stumbled upon a comment by a peak oil proponent that in ten years there will be 6 times as many automobiles in Asia as there are today. Since that is so obviously bullish for auto parts manufacturers I asked him where he got that statistic from.

Number of cars in China to rise seven-fold by 2020

Beijing - China is expected to have 140 million automobiles plying its roads by 2020, seven times more than now, fueling demand for transportation infrastructure and services, state media said Friday.

Li Xinghua, deputy director of the Communication Ministry's Comprehensive Planning Department, predicted that China's auto population would eventually reach around 250 million, or about 150 cars per 1 000 people.

Government statistics show that China produced a record four million autos in 2003, when the number of private cars grew by 80 percent thanks to the country's strong economic advance and growing middle class.

It is estimated that this year's production will top five million units, making China the world's third-largest auto manufacturer after the United States and Japan.

That demand has been coupled with the unveiling of ambitious expansion plans by both international and domestic auto players. ...

Statistics from the ministry show that China has already built a 30 000-kilometre network of highways, the second longest in the world.

Market analysts cited by Xinhua said China was in the launch phase of another round of economic growth and the rapid development of the auto industry would be a major driving force.

So how do I play it? Long HAYZ. $300 million market cap; $800 million enterprise value; $200 million ebitda. 15% revenue growth. Only 14% of those sales are to the Big3. Wheels aren't going away. Short GM as a hedge and peel it off when they issue the convert.

For a more speculative pure play on China I'm looking at TXICF.