After Monday’s massive spike, China Automotive Systems sinks on downgrade

What happened

Shares of Chinese automotive systems (CAAS 10.35% ), a leading supplier of power steering components and systems to China’s auto industry, fell more than 10% on Tuesday morning after a whirlwind few days. Here’s some background around the price movement and what it means for investors.

So what

China Automotive Systems’ decline on Tuesday, likely due to a sharp drop in analyst ratings, requires additional context, including its recent surge higher. On Monday, the automaker said it has shipped more than 120,000 steering units for electric vehicle (EV) models so far in 2020 and could exceed 140,000 units by the end of the year. Management is now targeting more than 200,000 steering unit sales for 2021. Jie Li, CFO of CAAS, said in a press release, “Our EPS product portfolio has the potential to become a major growth channel in the coming years as we capture more market share in the booming Chinese electric vehicle market. »

Image source: Getty Images.

These comments and projections helped drive the stock price higher, and it’s easy to imagine some investors simply taking profits today.

CAAS Chart

CAAS data by YCharts

Now what

Another driver of China Automotive Systems’ decline on Tuesday is likely Greenridge Global analyst William Gregozeski. He reversed his previous buy-to-sell recommendation while leaving his $4 price target unchanged, essentially suggesting that the only thing that changed was the massive surge in the stock price. Gregozeski told investors he expected “a slump toward a more normalized valuation.”

There is certainly reason to be optimistic about electric vehicles and especially China’s growth in recent years in the category. However, Monday also brought news that Kandi Technologies — another Chinese electric vehicle producer — allegedly made “false sales” to undisclosed subsidiaries of the company. There is no reason to believe that China Auto Systems has done anything wrong. But take a quick run-up in its stock price due to projections with a grain of salt and maybe wait for its stock price to normalize.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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