Opportunities In China's Extraordinary Battery Companies
Over the last couple years I've spent enough time in Asia to be fascinated by the growth opportunities and terrified by my own ignorance of the culture and the business dynamic. Since I know that I don't understand Asia, I tend to give Asian battery companies less attention than they deserve. Today I'll try to rectify that oversight. I'll also be adding New Energy Systems Group (NEWN) to my Chinese companies tracking list with a start date of June 30th.
The first Asian company most investors think of when you mention batteries is BYD Co. Ltd (BYDDF.PK). In my view, BYD is not a battery company. Instead, I view it as an automaker and cellphone component manufacturer that just happens to make some batteries. For the year ended December 31, 2009, BYD reported approximately $3.2 billion in automotive sales, $2.2 billion in cellphone component sales and $687 million in battery sales.
BYD gained a very high profile in 2008 when Warren Buffet's Midamerica Energy Holdings bought 225 million shares for $1.17 per share. At December 31, 2009, the 2.28 billion BYD shares outstanding had a net book value of approximately $1.22 per share. For the year, BYD reported a consolidated net income of approximately $0.26 per share, which works out to a net margin of roughly 10.4%. Based on the 2009 numbers, BYD's current stock price of $6.26 per share works out to 2.5 times annual sales, 5.1 times book value and 24 times earnings. While I don't necessarily think these market multiples represent a fair value, I do believe they can be used as a bright-line standard for comparing the relative valuations of the pure-play Chinese battery manufacturers.
The Chinese battery manufacturers I've tracked for the last year include Advanced Battery Technology (ABAT), China BAK Battery (CBAK), China Ritar Power (CRTP) and Hong Kong Highpower (HPJ). I originally excluded New Energy Systems from my list because it was a small manufacturer of battery components. Since last December New Energy Systems has bought two new subsidiaries, become a significant battery manufacturer and upgraded their market listing from the OTCBB to the Amex. Therefore I've decided to add New Energy Systems to my tracking list effective June 30, 2010.
The following table uses BYD as the comparison standard and shows how the market valuations of the pure play Chinese battery companies stack up.
Of the five pure play Chinese battery companies, the one that worries me the most is China BAK because its working capital is inadequate and its operating losses are substantial. The others are well-capitalized and exercise remarkable restraint when it comes to spending. My personal favorite in the group is ABAT, which started out as a lithium-ion battery manufacturer and has recently implemented a vertical integration into the electric two-wheeled vehicle market. My second favorite is China Ritar, which makes lead-acid batteries for a variety of applications.
While I'm still a bit provincial when it comes to my own portfolio because I don't understand Asia well enough, there are at least four pure-play Chinese battery companies that deserve serious consideration from investors who want the international exposure in a vibrant and rapidly growing sector.