Newsletter Watch: China BAK Battery

It's one thing when an advisor reads research reports and financial documents from companies to determine their value as an investment; it’s another to actually take the time to visit the company and meet with key management. 



While this extra step is no guarantee that an investment pick will be successful, “face-to-face” analysis offers an additional value step in the research process.



Particularly impressive with the advisor featured in today’s column is that Tony Sagami often travels to China to meet with the companies that are featured in his Asia Stock Alert newsletter.

His latest recommendation, China BAK Battery (Nasdaq:CBAK), is a bit off the beaten path, requiring not only a trip to China, but also a multi-hour train ride and a four-hour drive through “the back roads of China.” Despite the time and effort, Sagami says, "It was absolutely worth it."



"In my search for 'the next great opportunity,' I have found a company that is helping to power the 'Doodad Revolution.’ " Rechargeable lithium ion battery maker China BAK Battery has a market cap of $215 million.
 


"The firm’s batteries are used for just about every portable electronic doodad you can think of — cell phones, laptop computers, MP3 music players, PDAs, digital cameras, camcorders and Bluetooth devices — as well as industrial applications such as power tools and miners hats,” Sagami says, pointing out that lithium ion batteries offer the best weight-to-energy ratio of any battery and a slow loss of charge when idle.



Those characteristics make these batteries ideal for any application where weight is an issue, such as portable electronics. That same high energy density characteristic makes lithium ion batteries the best choice for hybrid vehicles (when it comes to gas mileage, a car’s biggest enemy is weight).



Sagami says the company’s main competitors are Japanese and South Korean, but notes that companies from both of these countries have substantially higher labor costs. The average wage in Japan is $2,700 a month and $1,500 a month in South Korea, according to Sagami. The average salary for a CBAK factory worker is around $160 a month.



Equally important according to the advisor is CBAK’s location in Guangdong province, the epicenter of Chinese manufacturing. That proximity, he says, gives CBAK another huge advantage over its Japanese and South Korean competition.



One important development that he noticed while visiting the company was its efforts to boost capacity for its laptop division. Indeed, the company told him that its laptop production capacity was set to double.



“CBAK has already been running three shifts and keeping its factory open 24 hours a day.” And, while touring the facilities, he says, “A small army of masons, electricians, carpenters, dry wall installers and HVAC workers were going gangbusters; that additional capacity is going to translate into more sales and more profits.”



In a meeting with CBAK’s chief technology officer, Dr. Mao, Sagami was also told that the company’s new factory in Tianjin will focus on larger batteries for things such as power tools, uninterruptible power sources and electric hybrid batteries.



"CBAK’s basic business is already strong. However, the electric hybrid vehicle market is a new one for CBAK — and one that could shoot its profits to the moon,” he says.



"I knew before I arrived that CBAK was already working with General Motors on its A123 Systems batteries, a new generation lithium ion battery based on nanotechnology that can produce cars which get 150 MPG,” Sagami says. “But what I didn’t know was that CBAK was also in talks with Japanese automakers. Between Chinese, American and Japanese automakers, CBAK should soon be making a mint from hybrid batteries — on top of its bread-and-butter consumer electronics business.”



Meanwhile, he says that Wall Street expects CBAK to make $0.29 a share on profits in 2008, which he points out would mean CBAK is trading for roughly 17 times this year’s earnings. But CBAK currently has $0.69 per share of “cold, hard cash sitting in the bank,” he says. If you back out that cash, he contends, CBAK is really only selling for 14 times earnings. This, he says, is a “bargain in my book."



According to Sagami, from a big picture, long-term perspective, “CBAK is in the right business at the right time and its future couldn’t be brighter.”

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