Integral Technologies (OTCQB:ITKG) has restructured and repositioned itself to focus on a proprietary conducive plastic technology, ElectriPlast, a resin-based, electrically-conductive material that, like plastics and rubbers, is malleable and can be molded into a wide variety of shapes and sizes. ElectriPlast is roughly 40%-60% lighter than metal and is non-corrosive. Management believes ElectriPlast has commercial applications in a wide variety of industries, including automotive, aerospace, consumer electronics and commercial aviation industries, among others.
Significant Demand Expected From Auto Industry
Fueled by government mandates to drive energy efficiency and the corresponding need to substitute lighter-weight materials in the automotive and other industries, coupled with more competitive pricing as raw material costs decline, ElectriPlast could be poised for considerable growth, we believe.
The government has mandated that by the year 2025, auto manufacturers comply with CAFE standards to reach 54.5 mpg, in order to become more energy-efficient. To help the industry reach these goals, on May 21, 2010, President Obama asked the EPA and NHTSA to jointly develop a national program that would "produce a new generation of clean vehicles," to lower energy usage. According to the Center for Automotive Light weighting, lightweighting, or incorporating lightweight materials in automobile production as substitutes for traditional, heavier materials, will boost fuel efficiency and lower emissions substantially.
In its study titled "Light Weight, Heavy Impact," McKinsey indicates that carbon fiber, compared to other lightweight materials, has the "biggest weight advantage, new design opportunities, but highest cost." Given the high cost, McKinsey believes that OEMs will "apply different lightweight packages with respect to car class and powertrain," with the highest percentage of lightweight material used in the premium, luxury automobile segment. The study also projects that the cost of carbon fibers will decline over time, reflecting technological improvements in its production. In turn, this will make carbon fiber-based products such as ElectriPlast more cost-competitive, in our view.
McKinsey further notes that, "the use of lightweight materials in… three industries… - automotive, aviation, and wind - will increase significantly in volume over the next two decades, creating a market of more than €300 billion for high-strength steel, aluminum, and carbon fiber." We believe this suggests that there could be a growing opportunity for ElectriPlast.
Hanwha's ElectriPlast Line Operational
To expedite its commercial launch, Integral has signed several manufacturing and distribution agreements with leading global players, including Hanwha, Delphi (NYSE:DLPH) and BASF Corporation (OTCQX:BASFY). Management believes these could be the first of many potential liaisons. Integral also believes South Korea-based Hanwha may be the closest to a launch commercial. Hanwha generated $35 billion in revenue in 2013.
Integral views Hanwha as the cornerstone of its strategy to penetrate markets in the overall region. Integral can leverage this relationship to fulfill orders from China, Japan and other countries in the Pacific Rim. The Hanwha relationship is key to ElectriPlast's potential in what is anticipated to be a rapidly growing market for automobiles.
China is an important market. It is the largest automobile market in the world, with 19 million new vehicles sold in 2012 and 18% per annum growth in 2006- 2012. If Integral can target China and other markets in the region with Hanwha, it could represent significant potential for ElectriPlast, in our view.
In April 2014, Integral announced that Hanwha had opened its ElectriPlast production line. With the line operational, Integral anticipates that Hanwha will have prototypes available shortly in order to begin the commercialization process. In addition to an upfront fee that Hanwha has already paid, Hanwha will pay a royalty for the ElectriPlast that it sells. Integral expects such Licensing Fees to be an important component of its revenue going forward.
Falling Carbon Fiber Prices Could Help Drive ElectriPlast Penetration
One factor that has constrained adoption of ElectriPlast until now has been its cost, due to the high raw material cost of carbon fiber, a critical component used in its production. However, largely reflecting falling carbon fiber prices, the price of ElectriPlast has declined by more than 50% over the last two years, according to management. The DOE has indicated that it would expect carbon fiber prices to come down further. If carbon fiber prices continue to fall, we believe it could make ElectriPlast more cost-effective as a lightweight alternative material and drive ElectriPlast adoption.
Strengthening Balance Sheet and Financial Reporting
Separately, the company has also made strides to strengthen its balance sheet, including retiring all of its outstanding convertible debt. Integral also hired a new CFO in Feb. 20, 2014, who has prior experience as CFO of IBM Australia, as well as at several privately held companies. Last month, the company appointed Baker Tilly Virchow Krause, LLP as its new auditor. Baker Tilly has over 80 years of experience, and is one of the top 20 largest accounting and advisory firms in the U.S.
Shares Represent Option on ElectriPlast's Successful Launch
ElectriPlast -- and Integral -- are still "show me" stories at this early stage, in our view. In fact, Integral has generated only minimal revenue during this early stage while it lays the foundation for ElectriPlast's commercial launch. Nevertheless, we believe that at the current share price, ITKG shares represent an option that the company successfully executes its strategy to commercialize ElectriPlast. With a new management team spearheading efforts and licensing agreements with major global players, combined with the tailwind of increased emphasis on 1) industrial lightweighting and 2) declining production costs of ElectriPlast, we believe the outlook for ElectriPlast and Integral has become substantially more favorable.
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