Better Lithium-Ion Battery Plays than A123 Systems

Battery maker A123 Systems (AONE) priced its $378 million IPO last night, selling 28.1 million shares at $13.50 each. The stock began trading today. The Company increased the deal size by almost 10% even after raising the offering price by 50% from the initially indicated range. Even if this IPO soars in the aftermarket, don’t feel too bad about being left out of the party because there are much smarter ways to play the lithium-ion battery market. Like China Bak Battery (CBAK), A123 is a money losing company trading on an excessively high valuation. Profitable alternatives such as Advanced Battery Technologies (ABAT), China Sun Group (CSGH.OB), Hong Kong Highpower Technology (HPJ) and China Digital Communication Group (CMTP.OB) all make for a better fundamental investment.

In evaluating this IPO, I am a very biased investor because I refuse to invest in money losing companies. When a company is being well received by investors because its “losses are declining,” I don’t feel too bad about not being part of the IPO party. A123 does have an impressive client list including Chrysler and Black & Decker. However A123 has only generated $168 million in revenues since being founded in 2001. On revenues of $168 million, the company has lost $146 million since its founding. I repeat, on revenues of $168 million since 2001, the Company has lost $146 million.

Comparing A123 to its rivals shows that A123 got one spectacular deal from its IPO price. A123 will have an initial market cap of around $900 million. Compare this to money-losing CBAK, which now has a market cap of $230 million. CBAK has generated revenues of $225 million in the past 12 months. Over the past 12 months CBAK has lost about $10 million. Clearly losing money is now the new trend in investing because CBAK soared 30% yesterday on news of the A123 IPO success.

I think ABAT is a much better investment. With a market cap of $268 million, ABAT trades at only 13x ttm earnings (yes, that’s right, EARNINGS). ABAT was recently awarded a $3.4 million contract for electric vehicles. Despite being a profitable way to play the lithium-ion / electric vehicle market, ABAT only rose 3% yesterday.

China Sun Group (CSGH.OB) is in the testing phase on lithium iron phosphate, the same product that is giving A123 such a valuation boost. CSGH.OB rose to a new 52 week high yesterday above $1.50 based on the A123 sentiment. CSGH.OB is profitable, cash rich and debt free and trades at only 9x earnings.

Notice that A123 includes Black & Decker among its notable customers. Black & Decker is not a vehicle manufacturer, but a hand held device maker. As a result, comparing to other small-size lithium ion battery makers (i.e. batteries for hand held devices) is also appropriate.

HPJ is a leading supplier of Nickel Metal Hydride batteries, and is moving into the lithium ion space. After its recent 50% run-up, the company trades at 17x earnings, but is profitable and debt free. HPJ rose as much as 10% yesterday.

CMTP.OB, now known as New Energy Systems Group, is profitable, cash rich and debt free and is rapidly expanding in the lithium ion space, but still trades at a P/E of only 4x ttm earnings. CMTP.OB also rose nearly 10% yesterday.

A123 may have fantastic technology and a great client list, but until it can demonstrate a clear path towards sustainable profitability I think it is meaningless as an investment. If A123 were a $100 million company with great prospects, it might be worth some kind of speculative punt. But at $900 million?! Don’t feel bad about missing out on this IPO.

Disclosure: The author is long shares of ABAT, CSGH.OB and CMTP.OB.

Comments

[Zenfar:]

I own AONE, BYDDF, HEV, and XIDE. I have traded in and out of CBAK and ABAT. But I like know that the Dept. of Energy as evaluated the tech at AONE, HEV, and XIDE and supports it. Also I like that Buffet (Munger) has evaluated the tech at BYDDF and supports it. A technology edge is a must if you want to make these types of batteries and vehicle profitable. Also IPOs tend to have a low float which helps share price.

Still a Rising Tide...

Sep 24 12:38 PM

[brucereno:]

Always insteresting to see the "excitement" in an IPO jump the first day. Great for the investment bankers and their favored clients, and costs a bundle for the IPO issuer...in this case aone.

So the stock jumped 44%.....at least 1/2 of that is planned underpricing by the investment banks involved...directly to the pockets of their select list. the other 1/2 is froth. I'll wait until the continuing losses take thier toll.

Sep 24 01:52 PM

[Douglas Kor...:]

I wouldn't buy Aone with YOUR money. It's got over 100 million shares, has about 2 years left of cash from the bailout (oops, meant IPO) at the indicated present rate of cash burn, and an unrealistic business plan. It's got to get a few cars on the road, in addition to the 100 plug-in-prii, that make it some money. The power tool market so far doesn't seem to generate any profits, and that's where the bulk of Aone revenue has been coming from according to the filing.

But who knows, hype may prevail. Remember all those sky-high fuel cell cars that Ford, GM and other car companies handed money to? Where's Plug Power, Ballard, etc., now??

Sep 24 01:59 PM

[Zenfar:]

I think it is a little different this time Doug, we have actual Hybrid cars for sale, not just concept cars. I have a Ford Fusion Hybrid and it is a very fun car.

Long AONE, XIDE, HEV, BYDDF, QTWW

Sep 24 03:03 PM

[Robert D.:]

I personally agree with the author that there are better investments in this industry than A123. Although there has been significant hype over this IPO that the run today is not a surprise. I definitely urge investors to practice caution when investing in this industry, as well as foreign companies. Feel free to check out my research on ABAT as well:

www.everyl.com/index.p...

Sep 24 03:07 PM

[Senan:]

Good to see there are so many players and innovation in the battery business (I had no idea!). If there's one single component of electronic devices that gets everybody it's the battery. Hopefully IPOs such as this will lead to big cash injections and big R&D spends on improvements...even if they are not necessarily ideal investments (as Rick says due to loss making)

Sep 24 07:22 PM

[John Petersen:]

You'll note that the two common denominators in the recommended firms are China and commodity batteries. None are working on the same class of large format high safety devices as A123 and none offer a bit of national security advantage to the U.S., and make no mistake about the national security implications because they are immense. In fact, they're the biggest reason for the administration's drive to build a domestic battery industry. A123s initial manufacturing was in Asia, but it looks like all of its planned expansion will be domestic. Any time a company can combine $400 million from investors and a like amount from grants, I have to like the risk profile.

Sep 25 09:40 AM

[Jake2:]

I enjoyed this article but it was not exactly in-depth. Electric cars are coming in force and in numbers: you can hear the hum. Each car will have a battery, of course. So where are all of the manufacturers and suppliers? Author only mentioned a couple.

Sep 25 01:04 PM

[Road Runner:]

Thanks for the good info on other battery companies in China.

Sep 25 01:10 PM

[Random Capital:]

All companies mentioned above represent the past in the battery technology. Antro Group will use a battery technology you haven't even heard of. All companies mentioned above represent a temporary hype nothing else. They aren't worth to be invested in.

For more info visit www.solo-duo.hu & quantumbattery.ch/drup.../

All other technologies are strong sell.

Sep 25 06:23 PM

[goober1:]

The entire lithium battery technology is doomed for vehicles. It is not a viable technology for numerous reasons, there is much research available from reputable sources to verify this on line. Our gov jumping on this to help "pump it up" will prove to be another gross waste of resouces. A123 is actually a recycle of previous failed entities if you look you will find this out. Good luck!

Sep 26 05:30 PM

[Mad Hedge F...:]

rti The spectacular debut of the IPO for A123 Systems (AONE), a maker of high powered, quick recharging lithium ion phosphate batteries using advanced nanophoshate technology, put a great shining spotlight on a sector I have been harping about all year (search my data base for “Butch Cassidy” by clicking here at www.madhedgefundtrader... ). The initial price talk was at $8, the IPO came out at $13.50, and the first day of trading took it up to a meteoric 43% to $19.20 on the first day! I had a flashback to the dot.com boom. Where are the gold flecks on the sushi, my free IPO hat, and the vodka luge? The fact is that this is an industry that is going to be huge in the next 20 years. The market for lithium ion batteries, which offer a 4X improvement over ferrous oxide predecessors in energy stored per unit of weight, is expected to grow from $32 million this year, to $74 billion by 2020. That is no typo; I really did leap from millions to billions. Their use is expected to spread from cell phones, to the electric car industry, to endless other applications. We are still in the ground floor elevator of the Empire State building. But outside of a few stocks like Chile’s Sociedad Quimica Y Minera (SQM), there have been few ways in which an investor can get involved in the lithium space (see my call to buy the stock in February before its healthy 60% move up at www.madhedgefundtrader... ). So when a small company like A123 opens a window, the investors dog pile in. Watch this space. Lithium could be the new crude, and companies like A123 could become the next Exxon (if Exxon doesn’t become the next Exxon). Kiss up to your long neglected broker and try to get in on the next allocation.

Sep 26 10:56 PM

[jsroundy:]

A successful IPO like A123 Systems following millions of VC investment usually indicates that the company has alot of promosing pluses, e.g. strong managment team, note worthy product development with superior technology, strong customer acceptance with at least minimum sales in critical mass industry. A123 seems to have all of this, except the next and most important step; customers buying in signficant quantities, EV's or PHEV's with A123 batteries inside. Until that happens, even with initial sales to the auto industry, you have a company that is churning through mountains of cash. The public wants to support an EV but only if it is price and value competitive. Up until now EV's have not been.

Sep 28 03:28 PM