Markets in recent months have not been kind to companies developing the next generation of batteries for electric vehicles. Many of these companies are in such an early stage of development that normal metrics such as revenue and earnings are meaningless. PE ratios and PEG ratios and the like mean little when you have no earnings. They remind me of the tech bubble of the late nineties when many companies with no track record or revenue were worth a billion dollars.
One company, Advanced Battery Technologies (OTCPK:ABAT) stands out. It has a known and growing market for its product, $100 million in revenues, and amazingly high net profits.
On the surface, ABAT looks like a screaming buy, selling for much less than our projected earnings value. Why is the stock such a bargain? The most likely reason is that a Seeking Alpha author (and short seller) in a detailed article, provided “evidence” the company has published misleading financial data. Was the author being honest? Other writers and the company have refuted the short sellers claims. We just don’t know, and the China based company hasn’t done a good job of communicating its side of the story.
For me, the decision to buys comes down to whether you believe the SEC filings or not. Phew! It is tough enough to pick stocks without wondering if the reports are honest. Whether these accusations are true or not has not been proven, and it seems that only time, and perhaps the hiring of a top drawer auditing firm will resolve this issue conclusively.
Lacking the energy and resources to judge the facts, in my case, I’ve decided to make a small long “bet,” and perhaps invest more in stages. In this way I will rely on the truth to emerge over time. According to our valuation model, the company is just too attractive an investment to pass up.
The past five full years of financial history show a consistent trend of impressive revenue growth with high net profits, and consistently growing income per share.
Source: SEC Filing
A little caution is needed in interpreting this growth as there are effects from acquisition. Not all the growth rates come from organic growth.
Pike Research forecasts more than 466 million e-bikes, e-motorcycles, and e-scooters will be sold worldwide during the period from 2010 to 2016. In the Feb, 16, 2010 release from the researcher they predict that Asia Pacific in general, and China in particular, will dominate the global electric two-wheel vehicle market, representing more than 95% of sales during the next six years. He expects that e-bikes will the largest category with 56% of the market, followed by e-motorcycles at 43% and e-scooters in a distant third place with less than 1%. They predict that the worldwide electric two-wheel vehicle market is expected grow at a compound annual rate of 9% through 2016.
A May, 2010 Economist article claimed that “local output grew from a few thousand bikes a year less than a decade ago to more than 22m last year, along with millions of kits to turn ordinary bicycles into electric ones. Annual sales have reached about $11 billion.”
Although lithium batteries are lighter and have some superior charging characteristics, a large portion of the e-bikes in production in China still use cheaper lead based batteries.
ABAT is a small player in the e-bike market. According to the Economist Article there are 1,000 firms thought to be actively using permits to make e-bikes. “The biggest manufacturer, Jiangsu Xinri Electric Vehicle Co, produced 1.8m “e-bikes” last year. Its lead is under threat from at least half a dozen other manufacturers. One rival, Tianjin Aima Science and Technology Co., says it is gearing up to make more than 5m bikes a year; Jiangsu Yadea Technical Development Co hopes to triple its sales to 3m this year.”
For the March 31st, quarter, these are the ABAT revenues
Source: SEC Filing
The largest segment of ABAT’s revenue was electric vehicles (mostly e-bikes/e-motorcycles). That segment grew at 40%. The company expects larger capacity batteries to lead the growth in their battery segment. Comments in the last quarter’s reports give the impression that although the company the company does not expect to focus on the small capacity battery segment, as it is very price competitive. The dollar value of the small capacity battery segment jumped, mostly as a result of acquisition.
Our long term growth assumption is 20% per annum, and we see upside to that predication. We assume that growth in the small capacity battery and miner’s lamp segment will be minimal. Just recent growth in the EV and Large Capacity battery segments alone could justify the 20% growth prediction.
In 2010 the company generated over $51 million cash from operating activities, and overall increased cash by $58 million. At the end of March/2011 the company had $86 million in cash and equivalents on hand. In the quarter the company generated $4.5 million in cash, but spent almost $30 million in property, plan, equipment and acquisitions.
ABT has managed to drive hugely profitable net profit rates over several years, in the order of 33%.
We would like to see a detailed quarterly breakout of product revenue, gross margin and profit – plus identification of major clients. A clear identification of profits by product category would be helpful. A quarterly summary of R&D related activities would also help. The company should provide a quarterly conference call and participate in a few investor’s conferences. The English language website shows poorly, and does not adequate information to investors.
On the negative side, the company is a small player in a highly competitive market. The company could be more transparent about sources of revenue and profit. At this point we are being cautious about the accusations made about the accuracy of the company’s reports.
On the positive side this company has a long track record of highly profitable growth, and has virtually unlimited room to take more market share, both as a supplier of batteries and as manufacturer of e-bikes.
Overall we rate the risk level as high or speculative.
Valuing the Investment
VineSecurityJournal.com uses a proprietary method to value technology growth stocks. The core of the technique is a projection of future revenues and net earnings, and we discount earnings according to the risk level.
Key assumptions are short and long term revenue growth rates, and short and long term net profit rates.
For ABAT, we are assuming long term revenue growth of 20%, and long term net profit rates at 10% (even though they have driven 33% recently.
Conclusion – Speculative Buy
If it wasn’t for the accusations hanging over this company we would be calling this a huge long buy opportunity. However the company needs to work on its public relations and investor relations, and clear up any possibility of doubt about the accuracy and completeness of their filings. They should consider an audit by a well-recognized audit firm, presentations by the company at investment conferences, and open conference call at the quarterly report, and a much more polished and informative English language web site.
As mentioned above, in spite of the risks, we have bought a small amount of stock and intend to follow and perhaps buy more stock in stages as the company cleans up its communications act.