New Energy Systems: Powerful Possibilities

| About: New Energy (NEWN)

New Energy Systems (OTC:NEWN) is a vertically integrated lithium-ion battery company that is leveraging its design capabilities to facilitate extended usage of portable electronic gadgets such as mobile phones. The company has come into its current state through a series of transformative acquisitions allowing it to span across the entire li-ion battery value chain to include capabilities in design, manufacturing and distribution.

Consumer markets are the core focus of New Energy, particularly users of Apple mobile devices and all major brands of cell phones, laptops, digital cameras, MP3s, etc.

New Energy Systems is not a traditional export ODM (original design manufacturer), rather a leading developer of products with in house marketing and design. Finished and unfinished batteries plus battery component manufacturing expertise keeps New Energy connected with leading mobile device manufacturers, such as Apple (NASDAQ:AAPL).

China's electronics industry growth has been driven by a combination of factors that include domestic and international demand, strong government support, and a favorable business climate for attracting foreign investment and technologies.

With rising incomes and improved living conditions especially in China's urban areas, demand for personal computers, mobile phones, LCDs, home appliances, multifunctional chips, and newly emerging electronic technologies such as FPD's has grown rapidly and continues to do so. Likewise, China's inexpensive consumer electronics have attracted increasing demand from abroad.

NEWN should benefit from the growing portable electronics market in China. The increased focus on international expansion with the launch of MeePower mobile power sources in the U.S. and solar mobile chargers in Europe is expected to further stimulate growth in revenues and margins. The addressable market for li-ion batteries is expanding.

Market research firm Frost estimated the global market for li-ion batteries is expected to grow at a CAGR of 13% to reach $38 billion in 2015. New Energy can leverage its low-cost production capabilities and its branded products to capture a slice of this vast market. The Chinese li-ion battery market is highly competitive and fragmented, with numerous players targeting the OEM, domestic, and export markets.

Company Background

  • Incorporated on March 27, 2001 in the State of Nevada as Jasmine's Garden, the company changed its name to China Digital Communication Group in September 2004 and to New Energy Systems Group (OTC:NEWN) during September 2009.
  • On November 15, 2004, NEWN acquired Billion and its operating subsidiary Shenzhen E'Jenie Technology Development Co. The company manufactures and distributes lithium battery shells and related products through E'Jenie, mainly in China.
  • On June 29, 2006, NEWN acquired Galaxy View and its wholly owned operating subsidiary Sono Digital Electronic Technologies Co. (―Sono‖), incorporated under the laws of the People's Republic of China on May 29, 2001.
  • On April 24, 2007, the company disposed off Galaxy View and its 100% subsidiary Sono by transferring a 40% stake in Sono to Wang Feng and a 60% stake to Liu Changqing for $3 MM. The company had a 10-to-1 reverse stock split on July 13, 2009.
  • On December 7, 2009, the company completed the acquisition of Anytone International Co. Ltd. (―Anytone International‖) and its wholly owned operating subsidiary Shenzhen Anytone Technology Co. Ltd. (―Shenzhen Anytone‖).
  • On January 12, 2010, the company acquired Shenzhen NewPower Technology Co. Ltd. (―NewPower‖). The company’s subsidiary, E’Jenie, acquired NewPower, under a share exchange agreement.
  • On November 10, 2010, NEWN announced the acquisition of Kim Fai Solar Energy Technology Co. Ltd. ("Kim Fai Solar"). The company’s subsidiary Anytone acquired Kim Fai Solar under a share swap deal.

Catalysts
The 2009 acquisitions of Anytone and NewPower moved NEWN into higher margin businesses, with precence across the entire li-ion battery value chain. Anytone brings significant R&D expertise and has expanded NEWN's offerings to include end-user branded products.

The latest press release confirms that Anytone can leverage its strong R&D capabilities to innovate new products to meet changing market needs, which can support NEWN's penetration into the direct-to-consumer market.

Last year NEWN entered into a distribution agreement with A-Solar, a European developer and distributor of solar-powered products for charging mobile electronics; this could be a catalyst for more international business opportunities.

During August 2010, the company announced the launch of MeePower. The success of this brand in the U.S. will further strengthen the company's international expansion.

Because of China's highly competitive and fragmented lithium battery industry I expect M&A activity in the li-ion battery space will gain momentum during the upcoming years, which will be beneficial for New Energy Systems. The company has demonstrated its ability to acquire and integrate, thereby expanding its business lines to become a bigger and more profitable enterprise.

Valuation
Management is reiterating its 2011 guidance as follows:

Revenue:

$130 to $135 million

Adjusted Net Income:

$24.5 million to $25.5 million

Adjusted EPS:

$1.69 to $1.75

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With a stock price of $3.47 the company's P/E is below 3. By expanding its distribution and growing its brand recognition I believe NEWN can grow its revenues by at least 20% on a yearly basis.

New Energy has a healthy balance sheet with more than $10 million in cash, $95 MM shareholder equity and almost no long-term debt as of March 31, 2011.

The company deserves a higher multiple, even at a P/E multiple of 5 the target price is the double than their current level.


Disclosure: I am long OTC:NEWN.