I was in London last week to attend a presentation by company that, at first glance, looks like a highly attractive investment. It has just reported rapid growth, announced a tasty dividend, and seems well set for a few more bumper years.
Despite this the shares trade on less than six times reported earnings and yield about 3%. The company is one of a handful of Chinese companies that have braved the AIM market, it is a maker of batteries, and the name is China Shoto.
However, owing to the fact that the China Shoto’s Chairman Cao Guifa and his fellow presenter Simon She, the Head of Engineering and Technology, had a weak grasp of English, the meeting and in particular the question and answer session were tortuous.
I do not blame the Guifa and She for this, as they certainly made a better job of it than I would make of presenting Red Hot Penny Shares to an audience in Beijing. But I do blame them for appearing to have a tenuous grasp of some basic and important items such as the tax charge, cash flow, production capacity and debt facilities.
Whether this was due to their not knowing the answers, not wishing to reveal them or simply not understanding the questions in the first place is impossible to say. It may have simply reflected the difference between the way business is done in this country and the way it is done in China, but if the idea of AIM’s many international flotations is to persuade foreign companies to conform to British ways, there is clearly some way to travel.
I was left wondering whether, in fact, Chinese companies do draw up long-term strategic plans? Do they discuss long-term financing arrangements with their bank manager? Do they sign contracts with their customers that stipulate payment terms and if so, does anybody take any notice?
The impression given was that China Shoto is run on pretty a much a seat of the pants basis, taking orders from customers and then worrying about things like production capacity and financing afterwards.
All in the financing
A revealing insight comes from China Shoto’s proud boast that its battery products won the 2007 Jiangsu Provincial Quality Award, and its technology centre ‘was recognized as the State Class Enterprise Technology Centre in September 2007.’
While the UK is not short of award ceremonies of its own they do not usually make the headlines of annual investor reports, but in China these accolades are dished out by the local mandarins in return for who knows what and are, if not a precondition for doing business, at least a crucial seal of approval.
Anyway the basic story of China Shoto is this. It is a producer of batteries with three factories in China, and is the largest supplier of back-up lead acid batteries. These are used as emergency power supplies in industries where any interruption of power from the grid would be highly damaging and expensive.
Demand for this type of back-up has increased in line with our dependence upon the micro-processor and the biggest user of lead acid batteries is the telecom industry. China Shoto’s growth is consequent upon it being a supplier to the main Chinese telecom companies at a time when 3G telephony is being rolled out across that vast country as fast as possible, with the Olympic Games adding a degree of urgency.
China Shoto also won a contract with Reliance, the Indian telecom company, last year including which its revenues from the sale of back-up batteries almost doubled and now accounts for three-quarters of its entire business.
China Shoto also makes batteries to be used as primary rather than back-up power supplies and a particularly fast-growing source of demand is for electric bicycles. Apparently more and more Chinese are forsaking their traditional pedal cycles, preferring the luxury of an electric bicycle that costs around £100 and needs a new £15 battery every year or so.
With these strong drivers of demand, the chairman of China Shoto mentioned a figure of 25% in answer to a question about the likely rate of growth in 2008, and demand from the Chinese telecoms industry is set fair for a further four years after that at least. Having come to an agreement with its major customers China Shoto has managed to protect itself from the rising price of lead, but the main question mark now hangs over its ability to finance its increasing output, especially as it is unwilling to raise new equity capital with the shares on their present low rating.
This is the type of chicken and egg situation which has PR advisers and brokers launching a major charm offensive. But an element of this needs to be a rather slicker presentation.
Regards,
Tom Bulford
for The Penny Sleuth
P.S. Sign up to The Penny Sleuth absolutely FREE and you'll be privy to my inner most thoughts, stories, projections and opinion on the UK's most exciting share market each and every week. The Penny Sleuth bulletin goes out three times a week drawing on all my contacts, knowledge and experience from within the City. If you’re an experienced trader or simply thinking about dabbling in the markets for the first time, each issue reveals what every investor ought to know before taking the plunge. Simply enter your email address below to subscribe,
