We are reducing 2009 forecast by 19% as we understand Peugeot sales have been affected by political tensions between China and France over Tibet since last year. In fact, China recently banned sales of Renault cars in apparent retaliation against Paris granting honorary citizenship to the Dalai Lama. Armstrong supplies a high value part, the door shield system, to Dongfeng Peugeot-Citroen Auto (DPCA) in China.

Still, we expect Armstrong’s China auto business to be the only segment to show growth this year while overall auto sales decline will be less than expected. China auto sales have exceeded forecasts in Jan-May, +21% yoy to 4.96m units. Also, Armstrong has been approved by a major customer in China for a large car seat-related part. Investment will not be substantial but the payoff could be significant as the part is higher in value than the door shield systems, its highest value part to-date.

Also, Armstrong is on track for 2Q09 to be far stronger than 1Q09 ($0.7m net profit, -83% yoy), as it has been experiencing a pickup in orders from all businesses since March, most notably its automotive plants in China and Thailand, while HDD has exceeded previously revised down expectations. There should also be a partial writeback of provision for forex loss as the US$ has fallen from the peak of 1.55 in 1Q09.

On the bright side, we also do not expect Armstrong to be affected by GM’s recent bankruptcy filing in the US, as direct customer Shanghai GM only accounts for less than 0.5% of total sales. In fact, it is likely that there would be no impact at all as GM is doing well in China and has astrong 50% partner in SAIC (Shanghai Automotive Industry Corp). However, if VW is affected, then there would be an impact as VW accounts for 10% of auto sales.

Despite the latest development over Peugeot, the market already expects 2009 to be a weak year hence there should be no adverse reaction in the share price. However, we downgrade our recommendation to Hold with a lower target price of $0.20 (still based on 12x P/E), due to lack of other positive catalysts.