We maintain our BUY call on Armstrong following a visit to its booming automotive parts factory in Changchun. In the past year, Changchun has surpassed Wuxi, which makes electronics parts, as the top producing factory in the group. Armstrong’s automotive business in China was the only segment to post positive 20% YoY growth in 1H09. With June and July continuing to strengthen, that growth looks set to continue in 2H09.

Although 2009 automotive growth is driven mainly by government subsidies at the grassroot level to boost domestic demand for vehicles, Armstrong will have the benefit of a wider product line-up at higher selling prices (and margins) to drive growth in 2010. There is also the potential to expand its involvement with a greater number of models with customers such as Audi (currently supplying only one model out of five).

New products include an EPP rear seat gasket for VW with a significantly higher price than other parts to-date. EPP has great potential to expand further as China wants to raise the level of EPP parts in each vehicle to 6.8kg (only half now). EPP is lighter than steel hence more environmental. We also saw a relatively high price point product for Peugeot. There is talk DPCA will make the 407 in China in future.

Armstrong is also interested in expanding into India, which was the world’s nineth largest automotive market in 2008 (but Asia’s third largest) with an annual production of 2.3m units (vs 9.3m for China) and 15% CAGR forecasted by Booz & Co by 2013. Management has already identified a local partner that is currently supplying die-cut parts to VW, BMW and Tata Motors, among others. A JV structure is likely.

We have kept our forecasts intact. Our target price is $0.34, pegged at 12x FY10 forecast. The stock trades at only 8x FY10 PE despite good growth prospects from the trough of this year. Group-wide, Armstrong has capacity for $230m in revenue and $23m in net profit (assuming 10% net margin). Its peak year was 2007, when it recorded $183m in sales and $20m in net profit.