Advanced Battery Technologies, Inc's Largest Customer Is the Chairman's Son
Seeking Alpha Analyst Since 2011
Our review of publicly available information, including the recent spate of lawsuits against the Company, reveals key areas that we believe merit serious attention:
Financial Numbers Do Not Add Up
We examined several areas in the reported financial statements, and the numbers do not make sense. In particular, we focused on the inventory and backlog.
Inventory
The Company’s reported inventory as of 12/31/10 was $5.2M, with average inventory for the year at $6.1M. We view this with great concern, in light of the fact that the Company was purportedly able to produce $100M of product in 2010 with an average of just $2.7M in raw materials, $0.6M of work-in-progress, and $2.9M of finished product per quarter. Keeping low raw materials on hand runs the risk of running out of the lithium, aluminum, rubber tires, etc. used to manufacture batteries and scooters, resulting in stoppage in the production process. In turn, keeping such low stock of finished products runs the risk of stock-outs, which may lead to inability to deliver finished goods to customer in a timely fashion, if at all. For a manufacturing company to be able to produce at this level, with both a limited amount of raw materials to draw from and limited amount of finished product on hand, means that it would have to attain extreme—if not unheard of—efficiencies. To understand this purported accomplishment in context, we examined peers in battery manufacturing and scooter manufacturing, including China BAK Battery Inc., A123 Systems, Altair Nanotechnologies, Piaggio & C., Zhejiang Qianjiang Motorcycle, and Polaris Industries, Inc. These industry peers report an inventory balance of 27% of sales, and 33% of cost of goods sold, while ABAT’s numbers show 5.4% and 9.5%, respectively. Inventory turns based on sales for the industry was 5x, compared to ABAT’s ratio of 18.6x.
Backlog
The Company stated it had a backlog of $49.7M in February 2010, of which $44M was related to batteries, all expected to be delivered within the year. Revenues for FY2010, at $97.1M ended up being about 2x the backlog. Assuming that there were no cancellations or delays of orders, and that the Company had a 100% fulfillment on backlog, subtracting the $49.7M backlog from reported revenues of $97.1M leaves $47.4M of unexplained revenue. If we are wrong in doubting the Company’s ability to close this large gap with new orders, then this would imply that the Company essentially was able to source, sign and deliver almost $50M worth of new orders within 12 months, which, in our expectation, would need to be supplied and manufactured without reasonable advance notice in context of preparing for manufacturing capability. This, we believe, would require near perfect operational efficiency combined with clairvoyance.
Output is Questionable
As part of our due diligence, we review available information, which often reveals information that is conspicuously missing. One item we expected to accompany the Company’s business updates is the announcement of more contracts, either in press releases directly from ABAT or from its customers and distributors. There were only $11M worth of contracts announced in 2010, including one to an Italian company, Menzaghi, for $350,000, in Q4 of 2010. However, by subtracting the reported backlog of $49.7M and the reported $11M contracts from reported revenues of $97.1M, we calculate there are $36M of revenues that are neither backlog nor publicly announced. In other words, the Company would have needed to generate $36M worth of new or refill orders on top of the backlog and announced contracts. There realistically might have been a steady flow of new significant contract announcements throughout the year, but we see no sign of them. If the Company deems a new order of as small as $350K as newsworthy (the Menzaghi order), we believe that ABAT would have been, or should have been, equally informative about other contracts of equal or greater value.
Questionable or Nonexistent Partnerships
The Company mentions in its latest 10-K (2010 10-K) a development and supply relationship with Altair Nanotechnologies, Inc. (“Altair Nano”), started in 2005. However, the filing does not make clear that the relationship has long since ended and had in fact concluded in 2006. The Altair Nano 2006 10-K filing states that “the 2005 partnering agreement has expired and Advanced Battery Technologies, Inc. re-ordered no additional materials during 2006.” We do not see further mention of ABAT in subsequent 10-K filings for Altair Nano. We conclude from this that Altair Nano is no longer involved with the Company, therefore it is in our opinion misleading and irrelevant for ABAT to have included in its 2010 10-K filing this partnership that ended five years ago. We invite the Company to offer guidance to the contrary.
Undisclosed Relationships
Our research turned up China Lithium Technologies, Inc. (OTCBB:CLTT.OB) (“China Lithium” or “CLLT”). According to China Lithium’s 2010 10-K, this company manufactures and markets Polymer Lithium-ion battery products. According to its own statements, China Lithium’s business address is listed as 15 West 39th street, suite 14B, New York, NY 10018. Interestingly, ABAT’s listed business address is 15 West 39th Street, suite 14A, New York, NY 10018. Evidently, CLLT and ABAT either share offices or are adjacent to one another. China Lithium lists in its 10-K and 10-Q filings as its largest vendor, Heilongjiang Zhongqiang Power Tech Co. Ltd.. In turn, Heilongjiang Zhongqiang Power Tech Co. Ltd. is actually a subsidiary of ABAT. According to these filings, China Lithium has purchased approximately $8M worth of product from ABAT in 2010. At the same time, ABAT lists that its largest customer represented 6.9% of revenues, or $6.7M. We believe this discrepancy casts doubt on the reliability of the Company’s revenue numbers since this corresponding revenue of purportedly $8M would be the Company’s largest revenue contributor. In addition, this revenue would be coming from a company in which ABAT’s CEO’s son (Qiang Fu) is a major shareholder and insider, owning 24.8% of China Lithium. We did not find mention of China Lithium or disclosure of this relationship in any of ABAT’s filings. In our opinion, the failure to make this disclosure and obvious conflict raises serious ethical issues and requires an immediate explanation.
In fact, China Lithium discloses this related party transaction:
INTERESTED PERSON TRANSACTIONS
In 2010, 2009, 2008 and 2007, Beijing Guoqiang entered into supply contracts of lithium-ion battery cell with Heilongjiang Zhongqiang, our major supplier. Our purchases from Heilongjiang Zhongqiang accounted for 88.54% and 92.74%, respectively of our total purchase during the year ended June 30, 2010 and 2009. One of our directors, Fu Qiang's father, Mr. Zhiguo Fu, is the CEO of Advanced Battery Technologies, Inc., which has exclusive control over the business of Heilongjiang Zhongqiang through entrusted management agreements. We believe that the terms of the supply contracts are fair as to our company and the prices of the lithium-ion battery cells are comparable to those produced by other lithium-ion battery cell manufacturers.
We implore the Company to offer clarification or explanation of these facts, if one exists. We believe that the undisclosed relationship with China Lithium Technologies alone serves as reason enough to call into question the legitimacy of the Company’s factual presentation.
Link to Altair Nano 2006 10K SEC filing:
sec.gov/Archives/edgar/data/1016546/0001...
Link to China Lithium 2010 10Q/A SEC filing:
sec.gov/Archives/edgar/data/888719/00012...
Link to China Lithium 2010 10K SEC filing:
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