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New Energy Systems Group (NEWN)

NEWN is a maker and distributor of lithium ion batteries in China.  They sell the shell and cap to other battery Chinese manufacturers as well as sell finished batteries.  Their batteries are used in everything from mp3 players to digital cameras to PDAs.  They have over 30 patents.

NEWN used to be known as China Digital Communication Group (OTC:CHID).  Their first acquisition was Billion Electronics which owned Shenzen E'Jinie Technology Development which got them into the battery making business.  In 2008, they diversified their business by getting into the finished battery business.  In 2009, they changed their ticker to CMTP.  Then in late 2009, they changed their company name to New Energy Systems Group (OTC:NEWN).

A week after their name change, they acquired Anytone International, which owned Shenzhen Anytone Technology.  Anytone researches, manufactures, and markets lithium batteries.  Anytone is projected to earn $6.7 million in net income.  NEWN's net income in 2008 was $4.45 million, so this purchase will significantly increase NEWN's earnings.

Near the end of 2009, NEWN acquired Shenzhen NewPower Technology.  This acquisition will enable NEWN to be able to manufacture the batteries from start to finish, thus increasing the margins for their finished battery business.  NewPower is projected to earn $2.5 million of net income in 2010.

NEWN is projecting to earn $15.4 million of net income in 2010, which is $1.23 per share and a 155% increase over 2009.  At a 17 PE, their stock would be valued at $20.78.  They have no long-term debt, and over $9 million in cash, which is $0.92 per share, so I would value NEWN at $21.70.

The NEWN management team seems hungry to grow, but they are being smart by acquiring companies that fall well within their domain, and are already very profitable and will contribute immediately to their bottom line.  They have cut spending 42%, yet are still increasing growth and profits at a substantial rate.

NEWN has already had a massive run up.  They were trading at under a dollar in early 2009.  The first big move up stopped at $10, and fell substantially to almost $5.  It proceeded to bounce around between $5 and $7.50 before finding support at $6 and a resistance just above $7.  In 2010, NEWN has broken out of that range, and made an initial run to over $9.  So far, there is support at the $8.50 level this year.

There are many risks involved with this stock.  First, it trades over the counter.  I am not a huge fan of OTC stocks, as they are less regulated.  The good news is that during the 2Q09 conference call, they said their goal is to become listed on either the AMEX or NASDAQ as soon as they meet all of the listing requirements.  Other risks involve the size of the company, and their lack of first-hand research due to their location.  A final risk I worry about is with translation.  The conference calls for NEWN are translated from Mandarin into English, and English questions are translated to Mandarin, answered in Mandarin, and then translated back into English, which allows many points of failure.

On the other hand, there can be many big surprises with NEWN.  They could win a huge contract by providing the batteries for a new major product, like a tablet or a cell-phone.  That news would send the price of their stock to huge.  I also believe that they will beat their earnings estimates, as all of their translated projections often include the words "at least", as in, "2010 net income guidance of at least $15.4 million."  They like to give conservative guidance, and they already met their 2009 guidance at the end of Q2.  Also, if they get listed on the AMEX or NASDAQ, the stock can have a nice boost and increased visibility.

This stock is not for the timid.  It is a wild ride that you have to have confidence with, or else you will bail out on the first big drop and take an ugly loss.  Do your own research before buying this puppy, because you will need the confidence that I have to ride the hills and valleys.  On my next trip to China, I am hoping to visit NEWN, and will let everyone know what I learn.

Disclosure: long NEWN