Rick Pearson's  Instablog

China Sun Group's Chairman: Q&ARick Pearson

DALIAN, China (TheStreet) -- China Sun Group(CSGH.OB Quote), a leading supplier to the lithium-ion battery industry in China, recently reported record revenue and net income for the fiscal year ended May 31, 2009.

On Sept. 9, I conducted a detailed interview with Bin Wang, the chairman and president of China Sun, and toured the company's Dalian factory. Also present were Guosheng Fu, vice president responsible for factory operations; Yijing Cheng, the chief technology officer; and Thomas Yang, who handles investor relations.

Coincidentally, this week Dalian is hosting more than 1,300 international leaders from nearly 90 countries for the World Economic Forum's Summer Davos event. Green energy -- particularly green autos -- is at the forefront of discussions.

China Central Television's cctv.com had this to say about the conference:

"The Summer Davos kicks off in Dalian on Thursday. And with the environment high on this year's agenda, it's no surprise that organizers are using the forum to launch a fleet of clean energy cars. More than 200 automobiles are parked in Dalian's Xinghai Square. Tour buses run on electricity, while the taxis are hybrid vehicles which can save up to 10% of fuel. Both buses and taxis have been developed and manufactured by Chinese companies and will go on trial use at the Summer Davos."

Following are some of the highlights from my discussion with Bin Wang, along with some photos of the production facility and R&D center.

Bin Wang explains the electron microscope to writer Rick Pearson.

Could you provide some background details about China Sun?

Wang: China Sun Group High Technology Company has been developing new energy technology in the area of cobalt and lithium-ion battery component materials since 2000 via our DLXY subsidiary (Dalian Xinyang High Tech Development Co). In 2008 the China Sun Group was recognized as a China Top 500 Strong company, and as a China Top 100 Strong SME (small and medium enterprise).

Our three main products are cobalt carbonate, cobaltosic oxide and lithium cobalt oxide, used in the production of lithium-ion batteries. Our production facility in Dalian spans 24,000 square meters and employs 258 people, including production-line workers, R&D, sales and marketing and management. On the R&D side, our cooperation with Dalian Communications University has provided us with shared personnel, equipment and technology, which has yielded significant benefits.

Earlier this year we converted three of our 12 existing cobalt product production lines to the production of lithium iron phosphate, a next-generation power source which is to be used in batteries that power environmentally friendly vehicles, such as electric and hybrid cars and scooters. This new product is currently in final stage testing by several of our large customers.

2009 was clearly a record year for China Sun Group. Could you share your thoughts on the company's performance?

We are extremely happy with our results for FY2009 across the board. It was a record year financially and we also made significant strategic achievements.

Financially, we achieved record revenues of $37 million, an increase of 46% over FY2008. At the bottom line we saw an increase of 27% in net income to $6.7 million. This was despite a very challenging economic environment and included significant business with new customers. On our balance sheet we ended the year with over $9 million in cash, up from $3.9 million at the beginning of the year. We have no long-term debt.

Over the past year we have also achieved several important strategic milestones. In April we produced our first batch of lithium iron phosphate, a next generation component for alternative energy batteries. We converted three existing production lines to produce our new product and expect to have a capacity of 450 tons per year. Our Tong Tong (brand name) lithium iron phosphate was designated as a "Priority Choice of Government Procurement" and is currently in the final stages of testing by several key customers.

What are your expectations with regard to the anticipated test results?

We are highly confident that the testing will be completely successful. The testing involves repeated charging and discharging of batteries, which in the past would take up to 50 weeks to complete. Now, with advanced technology, this type of testing can be completed in a much shorter time frame. Timing of the test results is in the hands of the customers, so we have to wait for each of them to give us the final results. As previously disclosed, we expect the results to be provided at approximately the end of September, depending on customer timing.

Could you provide some additional thoughts on your prospects with lithium iron phosphate?

China has been very focused on development of the battery industry. As stated in our annual report, in the PRC's 11th five-year-development project, research and development on the lithium ion battery has been added as a third objective.

VP Guosheng Fu explains the production line process to Rick Pearson with Bin Wang.

Cobalt-based batteries are primarily used in portable devices such as MP3 players, computers, cell phones, etc. We have seen a tremendous growth in the market for those products, and we expect that to continue.

In the near term, we expect to see significant use of lithium iron phosphate in electric and hybrid vehicles due to its significant advantages. Lithium iron phosphate batteries provide greater power, longer range and better safety than other current alternatives. They can be recharged in just a few hours and provide full power until fully discharged. In terms of its environmental impact, it is also the most environmentally friendly.

We received a patent for our lithium iron phosphate process from the State Intellectual Property Office of the PRC in September 2008 and under our brand name of Tong Tong, we received "Priority Choice of Government Procurement" and "Key Product Promoting the High-Tech Industry" certificates from the China Brand Promoting Authority.

How do you expect revenues of lithium iron phosphate to compare to your existing products?

We expect to see continued significant growth in the sales of our existing cobalt based products, which will also be complemented by significant sales of lithium iron phosphate. Overall, subject to the completion of testing, we expect that sales of lithium iron phosphate could add up to 20% to our total revenues in 2010.

What is the status of your cobalt project in Congo?

We currently believe we have a stable supply of raw materials, but in order to further diversify our supply chain we purchased interests in a cobalt mine in the Congo. We expect that during the first half of calendar year 2010 we will begin construction at a total cost of $2-$3 million. We project that the mine in Congo will be able to supply 100% of our cobalt needs going forward, and perhaps even some additional surplus which we can sell to the market. The political situation in the Congo has given some complications in the past, however Congo is a very large country and our project is located in a very remote area, so we expect to be able to proceed as planned. Furthermore, as previously disclosed, we he have had prior discussions with the Congolese Embassy in China which have been very productive.

So we are very optimistic about our prospects in this area, and in the meantime, our sources of raw materials are very stable.

An R&D technician at China Sun Group.

What are your other major initiatives for the coming year?

Going forward we are focused on increasing our dialogue with investors and improving investor relations. We are currently reviewing several investor relations firms, redesigning our Web site and improving our internal investor relations efforts. To further this end, Thomas Yang, responsible for investor relations, will be heading to New York in September for several months to interact with our U.S. counterparts and to meet with institutional investors.

 

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If I could be in two places at once, then one of me surely would be in New York this week, attending the Rodman and Renshaw Capital(RODM Quote) Asia conference. Rodman and Renshaw has assembled a very impressive roster of Chinese small-cap growth companies. In the China battery space, both Advanced Battery Technologies(ABAT Quote) and Hong Kong Highpower Technology(HPJ Quote) are presenting. Top China performers Rino International(RINO Quote) and FUQI International(FUQI Quote) are also participating in the conference, as are some very attractive names in agriculture and livestock: AgFeed(FEED Quote), China Agritech(CAGE Quote) and ZhongPin(HOGS Quote). All of these are worth looking into, and I hope to write about each in the coming weeks.

-- Written by Rick Pearson in Beijing.