One such company that comes to my attention is China BAK Battery Inc. (CBAK). This past week, CBAK was hammered by unusual selling volume. The selling volume derives pursuant a Form S-1 filed by CBAK on March 20, 2007.
The Form S-1 offers for resale by selling stockholders identified in the prospectus a total of 4,581,205 shares of CBAK’s common stock. Common Stock Outstanding immediately after the offering for CBAk will be at 48,889,646 shares.
No news has hit the wires about CBAK since it announced its results in mid-February 2007, so it is only logical to assume that the selling is driven by the S-1 filing as well as by “end-of-quarter” window dressing.
A unique opportunity is therefore present to get into a stock with a compelling business model that operates in China, has shown solid year-over-year revenue growth and is quoting at an appetizing low PE of 8.3.
But before one makes a decision to invest it is prudent to first review CBAK’s financials and determine they are in order.
CBAK is among the largest manufacturers of rechargeable lithium-based battery cells in China by production output. The battery cells that are principal components of rechargeable batteries for cellular phones, notebook computers, cordless power tools and portable consumer electronics, such as digital media cameras, portable media players, portable gaming devices and personal digital assistants, or PDAs.
I have included the financials of Advanced Battery Technologies, Inc. (ABAT.OB), which is a peer of CBAK. ABAT designs, manufactures, and markets rechargeable polymer lithium ion batteries [PLI's] that are used in consumer products such as laptops, PDA's, and cell phones.
Revenues for FY 2006: US$ 143.8 Million
Net Income after taxes FY 2006: US$ 20.16 Million
Diluted EPS FY 2006: $0.41
There is a strong build up of Call open interest at $ 7.5 (1,019 contracts as open interest) and $5 (1,411 contracts as open interest) for the front month of June. The puts are concentrated at $5 for the front month of June (795 contracts as open interest). This development is also worth noting.
Current Call OI: 2,706
Current Put OI: 1,194
Current Put/Call OI Ratio: 0.44
There are 3.14 million shares short and represent 6.42% of the total shares outstanding. Based on the average trading volume of 286,551, that implies 11 days to cover.
Fundamentally, the long-term growth story remains unchanged for CBAK. The demand for lithium-based batteries is growing rapidly and will continue to do so over the next few years. Any company servicing this market as an OEM provider, leveraging China’s cheap cost base for low cost skilled labor, must experience both revenue and margin expansion.
In light of the above data, the sell off in CBAK is a direct result of the S-1 filing and presents an opportunity to obtain a position in a solid China based growth stock. We expect CBAK to appreciate by over 50% to 75% in the coming 3 months.
Disclosure: The author does not have a position in CBAK at present. This may, however, change in the near future.