First published in Cleantech magazine, May/June 2009. Copyright Cleantech Investor Ltd 2009
by Andrew Hore
China Shoto is reaping the benefits of ongoing 3G investment in China as well as increasing demand outside of the country. The Chinese Government has earmarked a further RMB400 billion (£40 billion) for investment in 3G infrastructure, which requires back-up batteries. This level of investment in 3G is more than double that of last year.
China has a RMB4,000 billion Government investment plan, including the 3G spending. The country’s economy grew by 6-7% in the first quarter of 2009, and this rate of growth looks set to continue.
China Shoto, based in Jiangsu Province, specialises in valve regulated lead acid batteries, which it has been producing since 1995. These batteries, which have an electrolyte immobilised in an absorbent glass mat, are low maintenance and sealed against fumes, hydrogen and leakage. There is also a newer version of the VRLA battery with a gel electrolyte: this offers heat resistance, deep discharge resistance, long shelf life and high cyclic performance.
China Shoto supplies two main types of batteries: reserve power batteries and power batteries. The reserve power batteries are the core of the company’s business, having become increasingly important because of the demand for back-up batteries.
The Chinese Government has reorganised the mobile telecoms sector, reducing the number of companies from five to three – China Telecom, China Mobile and China Unicom. These account for well over half of China Shoto’s revenues, helping the company attain its position as market leader, with a market share of 20%.
Exports, which are growing faster than domestic sales, more than trebled from £6.92 million to £29.7 million in 2008, accounting for 16% of total revenues. India is the most important market, but the company is also opening offices in Moscow, Dubai, Singapore and Frankfurt.
The other key part of China Shoto’s business, power batteries for electric bicycles,has declined in the past year, although not as a result of any reduction in demand. This area is a more competitive market than that for back-up batteries, which means that margins are lower. Limited production capacity has resulted in management taking the decision to transfer capacity to the higher margin back-up batteries and reduce the output of bicycle batteries.
Unlike most of the companies joining AIM in the past few years, China Shoto’s shares are trading at well above the flotation price. The company raised £6 million (£5 million net of costs) at 130p a share when it floated on AIM on 6 December 2005. The shares are currently trading at 181.5p each, which values the company at £42.4 million.
China Shoto had been consistently profitable even before it floated: in 2002 it made profits of £1.24 million on revenues of £15.9 million. In 2008, profits increased from £7.16 million to £11.6 million, while revenues rose 70% to £183 million.
This improvement was achieved even though the price of lead ingot varied between RMB7,969/ton and RMB19,201/ton. China Shoto has contracts with many of its customers which limit its own exposure to lead price fluctuations. Reductions in waste have also helped to keep costs down.
Although China Shoto reports in sterling, its main currency is RMB. The change in the exchange rate over the year has meant that each RMB1 is now worth 32% more in pounds. At the end of 2008 the company had net cash of £22 million, a figure which was probably enhanced by the foreign exchange rate changes and the timing of payments.
One thing is certain, though: China Shoto has done well to reduce its debtor payment days from 69 to 57, and will do even better to maintain them at this figure. Most Chinese companies would be happy with debtor days of twice that number, and some have closer to 200 days!
The strong cash position means that China Shoto can afford to increase its dividend. Last year, the company paid one dividend of 4.5p a share. This year the final dividend is 3.5p per share, but an interim payment of 1.5p a share has already been made.
China Shoto continues to invest in research and development and has developed a spiral wound battery, which lasts longer than other batteries and also produces more power in the first few seconds of use. The company also says that is developing a “new type of green energy storage product with high technology content”.
Capacity is the main limiter on China Shoto’s progress. Despite its strong year end cash position, the company’s working capital requirements mean that it will probably need to raise money in order to increase capacity. House broker Seymour Pierce forecasts profits of £12.5 million this year, which puts the shares on less than four times prospective earnings for 2009. Management will not be keen to issue shares at that valuation, and this could hold back progress.
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