Apple Computer (AAPL) soared nearly 8% in after hours trading on Monday following its release of revenue and earnings that easily topped analyst estimates. This performance bodes very well for makers of lithium ion batteries such as China Bak Battery (CBAK), Advanced Battery Technologies (ABAT) Hong Kong Highpower Technology (HPJ) and China Digital Communication Group (CMTP.OB), none of whom has yet released quarterly results. All of these stocks are public and liquid, however they trade on very different multiples so investors should select carefully. CBAK is one to avoid for now, while CMTP.OB could be the next home run. ABAT and HPJ look fairly valued, but could benefit further if there are any positive earnings surprises.
Inside every iPod, iPhone and Apple laptop is a lithium ion battery. The lithium ion battery has become smaller, more energy efficient and longer lasting, effectively replacing the previous generation of Nickel Metal Hydride batteries. CBAK, ABAT, HPJ and CMTP.OB are all competitors in this market and are currently enjoying high margins as demand for products such as those made by Apple continues to soar. Apple’s strong results provide a great barometer for what to expect from upcoming earnings reports by these battery makers, all of whom should enjoy a strong pick-up in revenue.
Following the IPO of A123 Systems (AONE), CBAK’s stock price is up by over 50% as enthusiasm has grown for next generation battery makers. But like A123, CBAK is a money losing company. I would expect to see significant revenue growth from CBAK this quarter, but unless CBAK can effectively double sales from the previous quarter, it is unlikely to break even in the coming quarter. Following its recent run-up from below $3.00 to nearly $5.00, the company is currently valued at a $260 million market cap despite only making a small profit in one out of the past 8 quarters. Despite the hype for batteries, this is a stock that should be avoided by investors who focus on fundamentals.
HPJ has also enjoyed a spectacular run-up due in large part to the A123 IPO. The stock was trading at $1.38 in August and now trades in the $4.00-5.00 range. The stock looks intimidating based on its ttm PE multiple of 30x, but this doesn’t factor in HPJ’s huge growth potential. The company recently signed a contract with Siemens Gigaset Communications GmbH to supply batteries under the Gigaset name in Europe. This demonstrates some concrete progress in HPJ’s transition from being a supplier of Nickel Metal Hydride batteries into a producer of higher margin Lithium-ion batteries. The current wave of good news is already factored into the share price, but there could still be room for more upside if HPJ reports very positive quarterly results. The company already put out an interim report saying that sales for July and August are up 8% vs the comparable period one year ago.
These positive results for Apple and HPJ bode extremely well for China Digital Communication Group. The company derives 68% of its revenues from lithium ion batteries for hand held consumer devices such as MP3, MP4 players, cell phones and cameras. Despite significant revenue growth, the company still trades at around $9-10, a ttm PE of only 7x earnings. As a result, any positive surprise in earnings could put this stock up close to the $20-25 mark, in line with HPJ . The company has gross margins in excess of 30% and over $10 million of cash with no debt.
ABAT has long been in the small sized lithium ion battery business, but has more recently expanded into the larger format lithium ion battery for use in electric vehicles. The company recently signed a $8.7 million contract with Beijing-based U Long Run Sheng Technology Development Co. to supply electric vehicle batteries. Separately, ABAT recently raised approximately $20 million in an equity financing, the proceeds of which will presumably be used to fund its upcoming acquisition of a Shenzhen based small format battery maker (name yet to be disclosed). Adjusted for the equity offering, ABAT trades at approximately 13x ttm earnings. The company has over $60 million of cash on hand, but much of this is presumably already committed to it various acquisition and expansion plans.
Disclosure: The author is long shares of CMTP.OB