China Electric Motor's Recent IPO: Anatomy of a Trade

Includes: CELM, HRBN, ZSTN
by: Bill Simpson

I've never done this before. However, it seems that most 'ipo experts' out there do nothing but plug themselves even though most do not even trade or own ipos. At we put our money where our analysis is. Here is a little self-promotion:

We liked China Electric Motor (OTCPK:CELM) on ipo quite a bit (see analysis below), especially with the slashed $4.50 pricing. We owned a large position in the stock, which we sold the last of Monday at $7.70. We post real-time trades on the forum in our subscribers section, and have been for five years.

We consistently make money at tradingipos and have been fortunate to make a nice living for a decade now exclusively trading these ipos. As importantly, we help subscribers make money.

Before posting the pre-ipo piece on CELM, here are the timestamps/comments on CELM from the forum on our subscribers section. All, but the last, are from me:

Posted: 28 Jan 2010 11:40 am Post subject:

CELM..just looked at prospectus, appears same number of shares outstanding with new range, so this is a nice reduction in market cap and valuation.. at $4.50, it is priced to work.

Posted: 29 Jan 2010 08:01 am Post subject:

celm added 4.64 on stop.

Posted: 03 Mar 2010 08:58 am Post subject:

celm, yep we all here know this is going to run, most likely to at least 7ish...just a matter of time after AMCF (Andatee China Marine Fuel Services) popped. haven't been this sure of something in a long time

Posted: 09 Mar 2010 07:24 am Post subject:

CELM, yes $8 target. As I have been saying, this thing should hit at least $7 and that is the area I am looking to take some off.

Posted: 16 Mar 2010 07:36 am Post subject:

celm, am already loaded in the avg right around 4.85-4.90.

Posted: 12 Apr 2010 12:57 pm Post subject:

celm, playing out perfectly here although it is setting up for blow-off gap up in morning...I am out here of all 7.7's for final 1/3. nearly 60% gain on that last 1/3

and this post today from a subscriber:

Posted: 12 Apr 2010 07:03 am Post subject: CELM

just wanted to thank you guys for your input on CELM and Bill for your analysis. Even though I sold a bit early last week I still managed to make my year with it by taking oversized positions on the 2 runs from sub $5 to low to mid $6.


Following is the analysis piece I did on CELM for subscribers back on January 22 pre-ipo. These pieces are the basis for my trades...trades/positions I've posted in the subscriber section of for 5 years now.

Okay, the self-promotion is over. Anyone publishing the CELM analysis piece below, please do so with the above. The piece is now a bit dated as CELM has moved so much and it is now intended as a companion piece to the live trading comments posted above. Thanks.


China Electric Motor plans on offering 6.7 million shares at a range of $5.50-$6.50. Insiders will be selling 2.5 million shares in the deal. If over-allotments are exercised, the deal size will be 7.5 million shares. Note that in addition to the shares being offered, CELM is giving the underwriters warrants for an additional 425k of stock. Roth and Westpark are leading the deal. Post-ipo, CELM will have 20 million shares outstanding for a market cap of $120 million on a pricing of $6.

Ipo proceeds will be used to increase manufacturing capacity, to purchase more industrial space, to modernize factory equipment and for other general corporate purposes.

To Chau Sum will own 50% of CELM post-ipo. He is not listed as a company officer, however CELM's CFO and Chairman are also involved in To Chau Sum's investment and operation arms. While not operating CELM day to day, he appears to be the 'money guy' behind the creation of CELM and fully in control of management. CELM was once a shell symbol and there are a myriad of transactions with subsidiaries of China Electric, To Chau Sum's investment vehicles and WestPark Capital.

Westpark Capital founder Richard Rappaport will own 6% of CELM post-ipo. Mr. Rappaport also owns a similar % stake in recent ipo ZST Digital Networks (NASDAQ:ZSTN) and has already filed to sell that stake. Expect similar here with an insider secondary coming a few months after ipo.

**Private Placement - CELM did a private placement 10/6/09 at $2.08 per share. The ipo price mid-range is nearly triple this private placement price just 3 1/2 months later.

From the prospectus:

We engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances, are sold under our "Sunna" brand name.

Company makes micro-motors for consumer products, produces both AC and DC motors. CELM notes that micro-motors are 'simple to control, easy to operate and are generally very reliable.'

Motors for home appliances account for approximately 65% of revenues, motors for automobiles 22%.

Automobile uses for micro-motors include automated car seats, windows, trunks, door locks, mirrors, sliding doors and roofs.

Home appliance uses include hairdryers, air conditioners, paper shredders, soy milk makers, juice makers, electric fans, heaters and massagers.

As micro-motors are used in consumer appliances and newer model autos, CELM is a direct play on 1) growing middle class in China; and 2) the continued shift to China for the manufacture of small electronic appliances and micro-motor products. The latter is being driven by a lower cost manufacturing base in China as well as a growing end market in China and surrounding countries.

Motors are sold directly to OEMs and distributors. CELM produces 28 different series of motors with 1,200 different product specs. The majority of CELM's revenues are derived from custom products as only 6.5% of sales are for stock 'off the shelves' motors.

Top seven customers account for over 50% of revenues.


With any technology manufacturer, gross margins indicate where on the 'tech scale' the company sits. The higher the margins, the 'higher tech' the company, which generally leads to a higher than average multiple. Conversely, lower margins indicate a 'commoditized' type tech sector which generally lead to lower multiples. CELM resides in the lower margin area of the tech ladder. Through the first nine months of 2009, CELM's gross margins were 28%.

Approximately $1 per share net cash post-ipo.

CELM has no real accounts receivables issues. They've had no receivables on the books for over 30 days for the past few years.

2009 - Through the first nine months, total revenues look to be on track for $88 million, a 65% increase over 2008. Gross margins as noted of 28%. Operating expense ratio of 10%, putting operating margins at 18%. As is becoming the norm in China, tax rate is right around 25%, putting net margins at 14%. Earnings per share should be $0.62. On a pricing of $6, CELM would trade 9 1/2 X's 2009 earnings.

2010 - CELM's growth in 2009 was a little deceiving as their quarter to quarter revenues were flat through the first 3 quarters of '09 at $19 million, $22 million and $22 million. CELM had a huge revenues jump the first quarter of 2009 and maintained that new level throughout the year. Actually this is similar to their previous two years as it appears their new contracts kick in with the new year. We'll have a much clearer picture of CELM's 2010 revenue story after the first quarter. I would be surprised if CELM is able to grow revenues in 2010 much more than 30%. I am far more comfortable plugging in 25% revenue growth here. The good news is that CELM's gross margins do appear to be improving a bit due to product mix. At a $110 million run rate in 2010, with 30% gross margins, CELM should earn $0.90. This may prove to be a bit conservative, but with a micro cap I'd rather err on the conservative side. On a pricing of $6, CELM would trade 6 1/2 X's 2010 earnings.

A quick look here at CELM and Harbin Electric (NASDAQ:HRBN). HRBN produces all sorts of motors, while CELM focuses exclusively on micro-motors. HRBN - $569 million market cap. Currently trading 9 X's 2010 earnings estimates with a projected 90% revenue growth rate. Note that a large chunk of HRBN's 2010 revenue growth is expected to be driven by a significant 2009 acquisition. CELM - $120 million on a pricing of $6. Would be trading 6 X's conservative 2010 estimates with a 25% revenue growth rate. We have a growth and margin comparable here in recent ipo, ZSTN: Both ZSTN and CELM are lower margin and have similar 2010 growth rates; however, it's a very different tech sector. I do believe CELM is a much more viable growth story longer term than ZSTN. CELM has better gross margins than ZSTN, actually much better at a 2009 28% compared to ZSTN's 16%. In addition, CELM appears to be slightly increasing gross margins, while ZSTN's are faltering. Each expected to grow 25% in 2010. ZSTN currently trades 8 1/2 X's 2010 estimates, so simply on that basis it appears there could be appreciation here for CELM in range.

Conclusion - Somewhat commoditized Chinese tech microcap coming at an attractive multiple. CELM has shown strong growth in a difficult 2009. CELM has been operating cash flow positive since 2006 and has improved those cash flows each of the past three years. That is key here as we have seen numerous China microcap ipos that have been GAAP positive but operating cash flow negative. CELM has not only been operating cash flow positive for 4 years, they've increased those cash flows annually. That is a nice positive in an obscure microcap. The lower gross margins here means we should not get too excited, however in range this deal looks priced to work. Below range it is a no-brainer.

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