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Investing in a Profitable Lithium Battery Company

ABAT-Advanced Battery Technologies

Mkt Cap-$261.8mm, $3.80/share;

Financials as of September 30, 2010. Cash-$74.3 mm, $1.36/share in cash; Debt-Zero; 76.4mm shares outstanding.

I believe the electric car is going to be a market changing event, but not till the last half of the decade. If it is a last half of decade growth model, then the battery companies that sit on idle capacity built to capitalize on scale of electric cars, HEV and AONE, will not be profitable for some time.


Two Chinese battery companies I own are Advanced Battery-ABAT, and China Rita Power-CRTP. CRTP makes lead acid batteries without cadmium, environmentally friendly, through their own patent protected technology; however, I will be focusing on ABAT. 

 

ABAT, with its own patent protected technology, has five years of positive earnings and three years of positive FCF. ABAT has increased revenue from $31.86mm in 2007 to an estimated $100-110mm in 2010.


Current year EPS is likely to be roughly $0.60 ($0.45 through first nine months) which puts this year’s PE at 6.15x, subtract the $74.3mm in cash or $1.08 per share-through September 30, 2010- and you have a PE of 4.35x. ABAT has zero debt.

ABAT had increased its cash position 71% in the first nine months of the year from $52.9mm to $74.3mm. A move that CEO Mr. Zhigou Fu’s (who owns 12.8% of company stock and purchased 1mm of those shares at $2.65 on May 4, 2009) job easier of making acquisitions and increasing capacity as promised. A current completed upgrade to facilities was announced August 31, 2010-following a completed upgrade to facilities announced July 2009.

 

An update to cash on hand is a recent; November 30, 2010, $30mm capitalization event that caused investors to raise concerns-it was said, again, that it would be used for acquisitions and expansion.

ABAT registered a direct placement of approximately $30 million of common stock at a price of $4.00 per share. The Company will issue a total of 7,500,000 shares to the institutional investors.

In addition, the Company will issue to the investors warrants to purchase up to 3,750,000 shares of common stock, which, if fully exercised, would provide an additional $15 million in gross proceeds to the Company. The warrants have an exercise price of $4.00 per share and are exercisable for one year and one week following the closing date.

ABAT reiterated that the cash would be used for expansion and acquisition, the stock price has gone from a high of $4.28, November 29, 2010, to a low of $3.69 on January 7, 2010. The question was a matter of why cash on hand or stock was not used for this expansion and acquisition plans.

I believe the answer was satisfactorily given on December 20, 2010 when the acquisition and expansion was announced.

On December 20, 2010, the Company entered into an Acquisition Agreement with Shenzhen Zhongqiang New Energy Science & Technology Co., Ltd. ("Shenzhen Zhongqiang"). Shenzhen Zhongqiang is a manufacturer of lithium batteries for mobile phones and MP3 and video game consoles with a daily capacity of 70,000 battery cells. The total purchase price was $20 million, of which approximately $13.5 million will be used to satisfy existing liabilities of Shenzhen Zhongqiang. The Company expects to close this acquisition on January 1, 2011.

In order to add additional battery capacity, on the same day that it signed the acquisition agreement, the Company also entered into a letter of intent to purchase the land use right to a 54,000 square meter parcel of land together with buildings having 56,000 square meters of usable space in Dongguan City, Guangdong Province. The total purchase price will be approximately $26 million, and the Company has already made a deposit of approximately $1.3 million. After further investment, the Company plans for this new facility to have a capacity to produce 500,000 mobile phone battery cells and 70,000 Ah medium/large batteries on a daily basis, which could yield over $100 million in annual sales-according to CEO Fu. It will take at least 6 months to complete construction of the new facility.

Over 50% of ABAT’s revenue now comes from the early 2009 acquisition of Wuxi Angell Autocycle Co.-renamed Wuxi Zhongqiang-an electric scooter company. Current sales of two wheeled electric vehicles in Asia is 25mm units, growing to 78.6mm units by 2016, with a total 2016 worldwide projection of 466mm (Pike Research).

China currently accounts for over 95% of the electric two wheeled vehicle market, but ABAT has existing customers internationally with recent announcements of orders from Turkey, Italy, Germany, Denmark and Netherlands-with additional orders expected. These orders fit with company plans to expand sales in Southern Europe. Also, a June 6, 2010 order for $1.1mm (2,000 electric motorcycles) is the first order from a US firm, All-Power America, since the acquisition of Wuxi ZQ.  

Revenue is projected by the company to come in for 2010approximately  $100mm-$110mm for 2010 with net income at $32mm-$36mm. An increase of 65% ($63.56mm-2009) and 59% ($21.36mm-2009) respectively.

On October 31, 2010 ABAT had a backlog of $55.4mm for delivery through next 12 months including a battery backlog of $41.6mm.

ABAT switched accounting firms in December from Freidman LLP to EFP Rotenberg LLP. EFP Rotenberg is a Rochester, NY based firm. Freidman LLP is a NYC based firm. ABAT has an office in NYC with its executive offices in China.

ABAT looks to continue growth in the 30-50% range-a forward looking EPS of $0.84 and a PE of 8 (forgetting the cash) would put this stock around $6.72.

 



Disclosure: I am long OTC:CRTP, OTCPK:ABAT.