Better Lithium-Ion Battery Plays than A123 Systems

by: Richard Pearson

Battery maker A123 Systems (AONE) priced its $378 million IPO last night, selling 28.1 million shares at $13.50 each. The stock began trading today. The Company increased the deal size by almost 10% even after raising the offering price by 50% from the initially indicated range. Even if this IPO soars in the aftermarket, don’t feel too bad about being left out of the party because there are much smarter ways to play the lithium-ion battery market. Like China Bak Battery (NASDAQ:CBAK), A123 is a money losing company trading on an excessively high valuation. Profitable alternatives such as Advanced Battery Technologies (OTCPK:ABAT), China Sun Group (OTCPK:CSGH), Hong Kong Highpower Technology (NASDAQ:HPJ) and China Digital Communication Group (OTC:CMTP) all make for a better fundamental investment.

In evaluating this IPO, I am a very biased investor because I refuse to invest in money losing companies. When a company is being well received by investors because its “losses are declining,” I don’t feel too bad about not being part of the IPO party. A123 does have an impressive client list including Chrysler and Black & Decker. However A123 has only generated $168 million in revenues since being founded in 2001. On revenues of $168 million, the company has lost $146 million since its founding. I repeat, on revenues of $168 million since 2001, the Company has lost $146 million.

Comparing A123 to its rivals shows that A123 got one spectacular deal from its IPO price. A123 will have an initial market cap of around $900 million. Compare this to money-losing CBAK, which now has a market cap of $230 million. CBAK has generated revenues of $225 million in the past 12 months. Over the past 12 months CBAK has lost about $10 million. Clearly losing money is now the new trend in investing because CBAK soared 30% yesterday on news of the A123 IPO success.

I think ABAT is a much better investment. With a market cap of $268 million, ABAT trades at only 13x ttm earnings (yes, that’s right, EARNINGS). ABAT was recently awarded a $3.4 million contract for electric vehicles. Despite being a profitable way to play the lithium-ion / electric vehicle market, ABAT only rose 3% yesterday.

China Sun Group (OTCPK:CSGH) is in the testing phase on lithium iron phosphate, the same product that is giving A123 such a valuation boost. CSGH.OB rose to a new 52 week high yesterday above $1.50 based on the A123 sentiment. CSGH.OB is profitable, cash rich and debt free and trades at only 9x earnings.

Notice that A123 includes Black & Decker among its notable customers. Black & Decker is not a vehicle manufacturer, but a hand held device maker. As a result, comparing to other small-size lithium ion battery makers (i.e. batteries for hand held devices) is also appropriate.

HPJ is a leading supplier of Nickel Metal Hydride batteries, and is moving into the lithium ion space. After its recent 50% run-up, the company trades at 17x earnings, but is profitable and debt free. HPJ rose as much as 10% yesterday.

CMTP.OB, now known as New Energy Systems Group, is profitable, cash rich and debt free and is rapidly expanding in the lithium ion space, but still trades at a P/E of only 4x ttm earnings. CMTP.OB also rose nearly 10% yesterday.

A123 may have fantastic technology and a great client list, but until it can demonstrate a clear path towards sustainable profitability I think it is meaningless as an investment. If A123 were a $100 million company with great prospects, it might be worth some kind of speculative punt. But at $900 million?! Don’t feel bad about missing out on this IPO.

Disclosure: The author is long shares of ABAT, CSGH.OB and CMTP.OB.