Apple Results Bode Well for Lithium Ion Battery Makers

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

Comments

[adventure62:]

As battery demand increases, need for rare earth material will increase. This sector is overlooked by lot of people and hence could be a hot commodity sector !

Oct 20 11:48 AM

[Sufiy:]

If we decided to drive electric cars and charge their Lithium battery with wind, solar and other green power generated energy - time is study Rare Earth Elements. Every time you click on your Blackberry, iPhone or use your PowerBook you are at the mercy of all these elements.

sufiy.blogspot.com/200...

Oct 20 11:56 AM

[Advill:]

Small size batts is a different kind of animal, AONE has been doing small batteries for hand tools with success but moving this into the arena of big KWH applications is another story...as Piper trying to build a commercial jet....

In the medium term there is not shortage of Li. new amines are been discovered (one in Mexico last month) and there will be enough, price of batteries is another story, I recommend you read John Petersen or Mayascribe in SA about batteries John is expert.

How can you follow 694 in SA?

Regards.

Oct 20 09:32 PM

[RK:]

I thought most Apple notebooks have switched to using Lithium Polymer and Lithium Ion. Does this difference matter to your analysis? Just curious.

Oct 20 10:02 PM

[jerrydd:]

There is Zero connection between Apple profits and battery companies. They don't even make .000001 of the battery market.

Nor are battery companies that good of an investment because there are way too many for the orders. And Re, EV, PHEV's big orders are 3-4 yrs down the road. Many will fail in the next few yrs so be very careful and only buy companies with orders, good products, something rare in battery land..

John Peterson is biased to his former company, Axion which still hasn't produced a production battery as none of the Lead/carbon have. The small niche they might have, start-stop in cars, no car companies have even expressed interest publicly, much less bought any. He also ignores low prices of Lithium batteries you can buy now at far lower costs than he says you can.

They is no shortage of Lithium, etc for batteries nor are most rare earths rare. Mostly both have not had markets until now enough to support more than some small sources. The US has plenty of both, we just need to ramp up the production of them. .

There are some shortages of metals for mini electronics but that doesn't effect batteries and there are substitutes.

Be careful of the hype machine and bubbles batteries are now in.

Oct 21 09:39 AM