What to Expect from China Sun Group's Earnings and Test Results
China Sun Group High Tech Co. (CSGH) and other lithium-ion battery producers could benefit from several positive industry trends.
The big news in the Lithium-ion battery space last week was that CNOOC Group, Parent of CNOOC Ltd., [[CEO]] [[0883]] has signed an agreement worth RMB5 billion (US$730 million) with Tianjin Lishen Battery to build 20 battery production lines in Tianjin. Lishen will be supplying automotive Lithium-ion batteries to Santa Monica based Coda Automtive for it’s new Coda sedan. However, lithium-ion battery makers Advanced Battery Technologies [[ABAT]] and China Bak Battery Inc [[CBAK]] sold off as much as 5% on the news based on concerns over increased competition in the space.
Based on the CNOOC news and the upcoming earnings report due from China Sun Group [[CSGH.OB]], I felt it would be worthwhile to revisit expectations for CSGH. China Sun Group, which has the second largest cobalt series production in China, is due to report earnings within the next 3 weeks and is also expected in coming weeks to report test results from customers testing it’s new Lithium-iron phosphate product. For the 9 months ended Feb 28, 2009 CSGH has already achieved revenues of $27.4 million an 8.3% increase over full year 2008 results. Assuming a broad range of $5-10 million for Q42009, CSGH will show YoY growth of 28-49% revenue growth. For all 3 quarters, gross margin has been maintained at 37%, while net margin has held at 22-23%. Again assuming $5-10 million in revenues for Q4 2009, this would result in full year earnings of 9.5-26.6% growth YoY. This would imply a current P/E vs. full year 2009 of approximately 4.9.
China Sun’s position as a supplier to battery makers, as opposed to being a battery maker itself, is a favorable investment consideration, yet it continues to trade at a significant discount to battery makers such as Advanced Battery Technologies and China Bak Battery Inc. Following it’s convertible financing in June, and based on a fully diluted share count, ABAT trades on a P/E of approximately 20x TTM. CBAK’s current share price implies a $190 million market cap despite the fact that over the past 5 quarters it has had only one profitable quarter, making $480,000 in pre-tax income. While CBAK continues to note progress in securing automotive contracts, it’s low gross margin of only 11% means that it will need to achieve significant volume in order to justify it’s current valuation.
I continue to believe that the smart way to play the Lithium-ion battery space is not in buying battery makers, but in buying the suppliers to the battery makers, particularly given the sustainability of margins. Over the past 3 months CSGH issued two press releases noting that production of Lithium-iron phosphate has already begun at it’s Dalian facility and is currently undergoing natural decay testing by 6 potential customers.
It is worth noting that on May 22, before the announcement with CNOOC, Tianjin Lishen updated it’s website with a new article title “Lithium Iron (sic) Phosphate – a new type of Lithium-ion battery cathode material” highlighting the “obvious advantages” of Lithium-iron phosphate. This is not to suggest that Tianjin Lishen may be among CSGH’s test customers, but rather to highlight that CSGH is already in production and is ahead of the pack in being able to deliver the right materials which are currently attracting significant investment.
Given the current valuation of CSGH, it seems that the market is waiting for further news of contracts and their contribution to future earnings, while ignoring the fact that CSGH’s ongoing business is already on track to deliver significant growth and profitability for FY 2009.
Disclaimer: The author holds a long position in both ABAT and CSGH.
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com