Chinese battery maker charges on with listing plans

Chaowei Power Holdings, a manufacturer of lead-acid motive batteries for electric bikes, is going ahead with its listing plans even though the volatile market environment continues to claim victims among other listing candidates. The latest company to withdraw a share offer from the Hong Kong market is Xinjiang Goldwind Science & Technology, a manufacturer of wind turbine generators, which was aiming to raise up to $1.2 billion through a deal due to price last Friday (see separate story on our website today).

Chaowei is also seemingly not deterred by a recent profit-warning by another Hong Kong-listed company in the same industry, perhaps seeing this as an opportunity to capture investors who may be looking for an alternative. At HK$545 million to HK$725 million ($70 million to $93 million) the deal is small, however, and, according to a source, about 30% has already been covered by a cornerstone investor, getting it off to a good start.

The company kicked off the institutional roadshow yesterday and the final price is expected to be fixed on June 25. The trading debut is scheduled for July 2. BNP Paribas is the sole bookrunner.

The use of electric bikes is becoming increasingly popular in China as an environmentally friendly, low-cost and energy-efficient mode of transport; and Chaowei is the leading supplier of batteries for these vehicles with a 17.1% market share overall. Its market share, by revenue, grows to 18.3% if you count only lead-acid batteries, which account for more than 90% of the overall electric bike motive battery market due to their lower cost and stable performance.

Especially in lower-tier cities with less developed transport networks, these bikes are becoming one of the dominant travel modes, Chaowei said in a preliminary listing document. An electric bike is essentially a traditional push bike with a battery-powered motor attached that means the user either doesn't have to pedal at all, or will get some help powering the vehicle along when he or she wants, enabling people to cover greater distances at no extra effort. At a price of about Rmb1,500-2,000 ($220-$290), it is between half or one-third the price of a motorbike, making it much more affordable to low-income individuals. 

A report by global consulting firm Frost & Sullivan says the market size for electronic bikes has grown from 22.5 million units in 2005 to 81.4 million in 2009 even with a small decline in new demand due to the financial crisis. By the end of 2011 it projects there will be about 100 million such bikes trafficking the roads of China. An additional driver will be the government's Home Appliance Subsidy Program in rural areas, which was started in 2007 and expanded to the entire country during the financial crisis to help boost consumption in rural areas.

On the back of this, the electric bike battery market in China is expected to grow at a compound annual growth rate of 24% between 2009 and 2011. And that projection includes new batteries only. According to a source, Chaowei also has high hopes for the replacement market, which recently surpassed the market for new batteries in terms of unit sales -- the batteries are rechargeable, but have a life of only 1.5 years.  

Chaowei's revenue increased at a CAGR of 29% in 2007-2009, while its net profit expanded at a rate of 55%.

The company is offering 250 million new shares, or 25% of the company, at a price between HK$2.18 and HK$2.90 each. There is also a 15% overallotment option, which could push the total proceeds to $107 million, if also priced at the top.

Khazanah, the investment holding arm of the Malaysian Government, has agreed to come in as a cornerstone investor and buy 30% of the deal. This will give it a 7.5% stake in the company after listing.

The price range translates into a 2010 price-to-earnings multiple of 7.5 to 10. At the low end this results in a discount versus Hong Kong-listed Tienneng Power International, which yesterday closed at a 2010 P/E multiple of 9.8. The company, which also makes motive batteries primarily for electric bikes, traded at a P/E of more than 13 times at the beginning of last week before falling sharply on the back of the earlier mentioned profit warning.

The company told investors yesterday that it will use 55% of the IPO proceeds for capacity expansion, while the rest will be for M&A activities, to enhance its R&D capabilities and for brand building.

With regard to its M&A plans, Chaowei has signed letters of intent to acquire two smaller motive battery manufacturers, which will help increase its market share further and achieve higher growth.

Aside from the market environment, another potential concern is the movement in lead prices, since lead makes up the largest share of its raw material costs. In 2009, the purchase of lead accounted for 56.4% of Chaowei's total cost of sales and this increased further to 59.1% in the first quarter this year.

The issue was highlighted by Tienneng Power last week, when it warned in a stock exchange announcement that its first-half profit will be lower than in the same period last year as rising lead prices are expected to result in a significant drop in its gross profit margin. It stressed that this was a preliminary assessment only, but noted that the price of lead had "increased significantly through the first five months of 2010 as compared to the same period of 2009, whereas the average selling price of [Tienneng's] products just maintained a steady increase"  as it strived to maintain its competitiveness.

Tienneng's share price plunged 19% in response, significantly reducing its valuation, which meant Chaowei had to adjust its planned multiples slightly lower as well.

However, a source noted that Chaowei is not in the same position and added that lead prices have also flattened out since September last year. In fact, Chaowei's gross margin was very solid in the first quarter this year, he said.

In the preliminary listing document, Chaowei said the average price of lead on the Shanghai Metals Market was Rmb14,931 per tonne in 2009 and increased to Rmb16,007 in the first quarter 2010. However, being a purchaser of large amounts, the company's average purchase price over these same periods was Rmb11,837 and Rmb13,251 per tonne respectively - in other words, significantly below the market price. The company also noted that its "pricing strategy is to pass the risk of price fluctuations on to our customers", but acknowledged that it doesn't have any long-term contracts with its customers and doesn't hedge its future lead purchases.