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A little over one year ago, New Energy Systems Group (OTC:NEWN) was a much smaller company producing lithium battery shells and caps through its subsidiary E'Jenie Technology Development Co., Ltd (“E’Jenie”). Since then the company has changed its name (it was formerly called China Digital Communication Group), acquired Anytone International (H.K.) Co., Ltd. (“Anytone International”), Shenzhen Anytone Technology Co., Ltd. (“Anytone”, Anytone is a subsidiary of Anytone International), Shenzhen NewPower Technology Co., Ltd. (“NewPower”), Shenzhen Kim Fai Solar Energy Technology Co., Ltd. ("Kim Fai/Anysolar"), and listed on the NYSE Amex national stock exchange.

The company is now much larger in terms of revenue, net income and earnings per share. Total 2009 revenue, net income, and adjusted and fully diluted earnings per share (excluding stock-based compensation and amortization) were $26.38 MM, $5.84 MM and $0.89 respectively. In early January, 2010 the company gave guidance for 2010 of $89.1 MM revenue, adjusted net income of $15.6 MM, and at least $1.23 adjusted and fully diluted earnings per share. The company just updated guidance for the full year 2010 to $95 MM revenue, $18 MM adjusted net income, and $1.40 adjusted and fully diluted earnings per share.

The press release stated

While we have increased our 2010 guidance significantly, we believe the revised guidance is conservative.

This is similar to what they said in January 2010 and will indeed prove to be conservative as shown below.

The individual divisions' revenue and revenue growth rates are shown in the table below. Kim Fai/Anysolar is excluded since the acquisition just occurred.

Anytone

Revenue

Yr/Yr Revenue Growth

2008

$10.1 MM

140.0%

2009

$24.2 MM

140.0%

2010 (thru 9 months)

$33.1 MM

82.4%*

New Power

2008

$12.2 MM

31.65%

2009

$20.1 MM

64.8%

2010 (thru 9 months)

$25.3 MM

67.8%*

E'Jenie

2008

$19.7 MM

629.6%

2009

$26.4 MM

34.0%

2010 (thru 9 months)

$13.8 MM

(30.4%)*

* 2010 year/year growth rate calculated as (2010thru9mos / (2009 * 0.75)) - 1

Obviously the growth is coming from the Anytone and New Power divisions.

2010 4th Quarter Outlook

The 4th quarter has historically been the strongest quarter for each of the existing divisions at New Energy. Anytone and New Power have also been showing strong sequential quarterly growth. Given this, it is fair to assume that the 4th quarter of 2010 will at least equal the 3rd quarter 2010 performance for the existing businesses (excluding the new Kim Fai Solar acquisition). The total company revenue for the 3rd quarter was $26.4 MM and GAAP net income was $4.3 MM.

Adding that to the 9-month revenue and GAAP net income totals so far for 2010 ($72.2 MM and $11.6 MM) yields $98.6 MM and $15.9 MM respectively. However, since the Kim Fai Solar acquisition was done in mid-November that division will contribute about half a quarter's revenue and net income.

From the press release announcing the Kim Fai Solar acquisition: "Kim Fai is expected to generate approximately $24.0 million of revenue and $5.0 million of net income in 2011" and "we believe Kim Fai's revenue will grow over 30% in 2011 and will experience similar growth in the years to come."

30% growth to $24 MM revenue means that Kim Fai will do about $18.5 MM revenue and $3.8 MM net income in 2010. Half a quarter or 1/8 of this is $2.3 MM revenue and $0.48 MM net income.

Therefore, it is clear that New Energy will report at least $100.9 MM revenue, $16.4 MM GAAP net income, and GAAP earnings per share of $1.27 on 12.9 MM shares (full year 2010 weighted average). It is necessary to add back in the non-cash stock-based compensation and amortization expenses to arrive at the adjusted earnings per share number that the company will report. That is about $3.5 MM so the adjusted net income will be $19.9 MM and with a weighted average of 12.9 MM shares for the full year the adjusted earnings per share will be about $1.54.

Again, this is why the company just said this about the revised guidance of $95 M revenue and $1.40 adjusted earnings per share numbers:

While we have increased our 2010 guidance significantly, we believe the revised guidance is conservative.

The estimates above do not reflect any sequential growth for the strongest quarter of the year yet they will handily beat the newly revised guidance.

2011 Outlook

To arrive at estimates for 2011 the 2010 4th quarter Kim Fai Solar contribution must be backed out and added back in. The existing business numbers will be approximately $98.6 MM revenue and $15.9 MM GAAP net income for the full year 2010 as noted above. The company has consistently stated that it will grow faster than the overall market it serves, which is growing at an annual rate of 20%+ as stated in the company's latest investor presentation, which was filed as an 8-K with the SEC on 11/18/2010.

The 2011 outlook will assume 30% growth for the entire company, which is obviously conservative given the demonstrated growth rates as noted in the table above. In fact, running pro forma numbers for 2009 and comparing to the Anytone/New Power/E'Jenie estimates in 2010 yields a 39.5% growth rate year/year. Therefore, 2011 revenue will be about $128.1 MM + $24 MM (contribution from Kim Fai Solar as quoted above) or $152.1 MM.

Assuming net margins equal to 2010 of 16.4% for the existing businesses gives GAAP net income of $21 MM for Anytone/New Power/E'Jenie + $5 MM for Kim Fai Solar or $26 MM total. The fully diluted share count for 2011 will be 14.5 MM so the GAAP earnings per share will be about $1.79. Adding back the non-cash stock-based compensation and amortization expenses of $3.5 MM yields adjusted net income of $29.5 MM and adjusted earnings per share of $2.03.

Valuation

There are many ways to estimate fair value for a stock and probably the best is discounted cash flow. The trailing adjusted earnings per share is about $1.40 at the moment and a 20% 5-year growth rate is assumed although demonstrated growth rates have been higher as shown above. The assumed discount rate gets tricky because of the fact that there has been a general suspicion of Chinese companies in recent months as a result of the widely publicized scandals in that sector. Using an equity risk premium of 5.1% (the average from a fairly comprehensive survey of money managers in 2010) and NEWN's beta of 1.65 along with the 10-year note yielding 3.32% as of this writing along with an adjustment for the China factor, it is safe to assume a 13% discount rate for this stock. The fair value using these assumptions is about $22.00.

A far simpler yet more widely used approach is to assign a forward PE ratio. The kind of demonstrated growth this company has shown certainly justifies a higher PE, but it is common to see a forward PE ratio of 10 assigned to stocks in this space showing similar growth rates. A 10 forward PE ratio on 2011 estimated adjusted earnings per share of $2.03 yields a fair value of $20.30.

No matter which method is used it is fair to assume that NEWN is undervalued at its current price of $7.40.

Technical Considerations

It seems that the market is beginning to pay more attention to this undervalued company. On 12/8/2010 the stock's 50-day moving average crossed above its 200-day moving average, which is known as the golden cross. This longer-term buy signal is utilized by many people in the industry. While it is no guarantee of price appreciation, the last time this signal was generated in early May, 2009 the stock (trading as CHID.ob then CMTP.ob) went from $0.61 to a high of $10.00 in about five months.

Source: New Energy Systems Group: Larger, But Still Undervalued