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Sunday, February 05, 2006

SORL Auto Parts (SAUP) 10-K, incomplete

10-K document
Full year ending Dec 31, 2004. Incorporated in Delaware.
NO. 1169 Yumeng Rd
Ruian Economic Development District
Ruian City (city website), Zhejian Province
PRC
86-21-6440-1678

a not very interesting blurb on SORL.

Here's a competitor (VW and Lada) with less than 100 employees, 11-20 in R&D, US$5 million to US$10 million in sales, 90% exported established in 1997.

13.3 million shares of stock as of March 18, 2005.

Yet another Chinese reverse merger effective May 7, 2004. Previously The Enchanted Village. Acquired 100% of Fairford Holdings Ltd, a Hong Kong LLC. Fairford became The Enchanted Village on May 10, 2004, which became SORL Auto Parts, Inc in July 2004. The Series A convertable preferred stock was converted into common and there was a one-for-fifteen reverse stock split (which is common for reverse mergers).

The Company (through Fairford) owns 90% of Ruili Group Ruian Auto Parts Co., Ltd. through a sino-joint venture (so this is not a wholely owned foreign enterprise). Ruili Group was established in PRC in 1987 and specializes in auto parts. The joint venture was established on March 4, 2004. Fairford contributed 90%, Riuli Group 10% of the $7.1 million contributed capital.

NOTE: Don't confuse the Ruili Group Ruian Auto Parts operating company with the Riuli Group, Co. which owns 10% of the operating company (Fairford owns 90%).

42 customers, including all the truck manufacturers in China. Largest 3 customers were 31% of sales in 2004.
FAW Qingdao Automobile Works 18.83% (one of the top 5 carmakers in China)
First Auto Group Purchase Dept 6.96%
Liuzhou Special Auto Mfg Co 5.48%

April 2002, two shareholders essentially took over the prior company (which was apparently dormant and revived). They dealt with Keating Reverse Merger Fund LLC. The company sold 500K shares of common stock to the Keating fund. This article mentions SORL and Keating.
SORL has a market cap of $80 million. It had $33 million in sales last year and expects $46 million this year. Keating and its Chinese partner charged it $400,000 in fees and also got 4.5 percent of the newly merged company. The money for the shell, Enchanted Village Inc., came from Keating Reverse Merger Fund LLC, which was formed to invest in shells and also in private companies planning to reverse merge into the shells.
and this is encouraging:

Dennis Depenbusch, CEO and chairman of Fort Worth, Texas-based Catalyst Lighting Group Inc. (OTC BB: CYSL), said he probably researched more than 100 firms before selecting Keating to help with its reverse merger.

He picked Keating partly because of the registration of its employees with the NASD and because of their experience. "Keating was the only one that has good, pedigreed professionals that have registered with the NASD," he said. "You really need to do your homework, because the reverse-merger world has a bad reputation."

Keating's references checked out, and Depenbusch also liked its turnkey approach. "I have not run across a shop of integrated professionals like Keating. He's unique in that way," Depenbusch said.

They did a standard reverse merger with Xiao Ping Zhang, Xiao Feng Zhang, and Shuping Chi who owned Fairford Holdings Ltd, a HK LLC. Fairford acquired Riuli Group's assets and liabilities for $6.4 million, the price set by Ruian Ruiyang Assets Valuation Co., Ltd. which is a PRC valuation firm (can't find via Google). Fairford transferred all this to the Ruili Group Ruian Auto Parts Co., Ltd. joint venture.

There are 3 directors in the Joint Venture board. Fairford designates 2 of them and selects the Chairman. Ruili Group designates 1. The joint venture expires in 2019. What happens then??

SORL manufactures and distributes air brake valves and hydraulic brake valves in China for use in vehicles over 3 tons: trucks, vans, buses. There are 36 catagories of valves and 800+ specifications (which helps make it more of a niche, but possibly with lower margins). They believe they are the largest manufacturer of brake valves in China.

ISO 9001/QS 9000/VDA 6.1 certified. Passed ISO/TS 16949 certification. Company provides a 50,000 to 60,000 kilometer warranty. "Warranty expense has historically been immaterial."

3 markets:
  1. OEM manufacturers in China. 47% of revenues
  2. Aftermarket distributors. 26% of revenues
  3. International customers. 27% of revenues
Long term relationships with most of the OEM customers. Three largest customers represented 31% of revenues. This includes First Auto Group, which is one of the top 5 car makers in China.

Here's an interesting article about business in China and the political strife going on. It seems like it's from around 2000.
The government is trying to buy time for a select few companies deemed too important to flounder. First Auto Group, the single biggest employer in Jilin province, is really a city: a population of 250,000 workers and dependents, 23 schools, a general hospital and a TV station beaming the latest company news to the world's most inefficient autoworkers. An average employee produces just two-and-a-half cars a year; a General Motors worker makes nearly 10 times as many. First Auto could easily cut seven of every 10 workers, estimates U.S. management consultancy A.T. Kearney. But the company muddles along through government subsidies, policy loans and profits from a joint venture with Volkswagen. So far, layoffs have hit only one in 10. "We at First Auto must be responsible to our staff," contends Wo Zongsheng, its deputy director of corporate strategy. These days First Auto is an exception. Beijing is running out of resources and can no longer maintain life support for its relics.
FAW Qingdao Automobile Works: 19% of revenue
First Auto Group Purchase Dept: 7% of revenue
Liuzhou Special Auto Mfg Co. Ltd.: 5.48% of revenue

19 sales employees.

SORL rents warehouse space from customers to provide on-site storage of finished products. The space is generally enough to store one week of inventory. Ruili Group has an R&D center in Shanghai under construction. There's also access to Ruili Group's three-year cooperation agreement with Tongji University, a leading university in auto engineering (their website shows an automobile engineering dept in the mechanical engineering college). They have access to 92 technical people on a negotiated basis. They also have access to consulting at Zhejiang University and Northern Communications University.

One patent: expires 2012, covers "an automotive clutch empower device."

Oops, I just saw that Officers and Directors as a group own 75% of the stock. Xiao Ping Zhang owns 68%. For that reason, I'm putting this on hold for now. I don't expect to ever be invested in SORL.

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