Tuesday, March 11, 2014

Turning Conventional Battery Tech into Unconventional Profits

Near the end of February 2014, Highpower International (HPJ:  Nasdaq) announced its first order for large-format lithium ion batteries to use in electric vehicles. Its customer, Huizhou Yipeng Energy Technology will be integrating the batteries into buses destined for the sales outlets of China-based manufacturers. 

The boost in sales for Highpower is likely to be meaningful.  Management estimates each bus will use as many as 288 of the company’s 20-ampere-hour battery.  Guidance for annual sales from Huizhou Yipeng alone is in a range of $4 million to $5 million.  In the most recently reported twelve months Highpower claimed $125.2 million in total sales.  That means the orders from Huizhou may boost annual sales by 3% to 4%.

Highpower has been earning a slim profit on its sales of nickel metal hydride and lithium ion battery technologies for motor bikes, power tools, and personal-care devices.  The company has production facilities in Shenzhen and Huizhou, China.  Its recent operating profit margin was 1.2%.  Still over the past for years the company has been successful in converting 3.1% of its sales to operating cash flow. 

The ability to generate internal resources is vital for Highpower, which continues to invest heavily in capital projects and product development.  Operating profits are not sufficient for the company’s investment budget.  Thus cash resources continue to be important for Highpower’s strategic plans.  Cash at the end of September 2013, the last time the company reported financial results, was $37.1 million. 

The company also has $68.7 million in short- and long-term debt on its balance sheet.  Debt is not the only balance sheet consideration.  Typical of China-based companies, Highpower carries significant accounts receivable and accounts payable on its balance sheet.  Days sales outstanding were 105 days at the end of September.  At least Highpower has managed to maintain good enough relationships with suppliers to leave 148 days of costs in payables outstanding.  Highpower maintains a relatively low inventory at only 62 days of sales.  Thus the company enjoys a favorable financing interval and actually receives 19 days of financial support from suppliers  - a  value near $5.3 million  -  instead of having to dig into cash resources to support working capital needs.

A review of recent trading patterns in HPJ shares suggests the stock has built up enough momentum to rise to the $8.00 price level.  Yet there appears to be some disagreement among investors about the company’s future.  In the final day of trading last week the stock completed the formation of what technical analysts call a ‘high pole warning,’ suggesting that lower prices may be ahead at least in the short term.  We believe this could be trading in HPJ shares illustrate the usual fascination with the strong growth that China offers, but the ever present concern that investors have for the veracity of financial reports from China-based companies.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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