Lower margins spooked investors but prospects, backed by earnings, remain strong
Hong Kong-listed Tianneng Power International is leader in the Chinese new energy battery industry and is labelled as a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles.
Tianneng’s main products and services include power storage ancillary services, production and sale of lithium batteries for new energy vehicles, start-and-stop batteries, wind power and solar power storage batteries, the recycling and cyclic utilisation of waste batteries and construction of smart-micro grids in cities across the nation, along with the building of green and smart industrial parks.
Tianneng is a key player in the value chain of China’s goal in becoming environmentally friendly in the future. The company reports two segments: First, the sales of batteries and battery-related products, the other is the trading of new energy materials. The company is the other stock from our 2021 portfolio, and we believe the stock is trading cheaply. The general decline of the benchmark Hang Seng Index to a certain extent affected the company, as companies generally with no news will tend to follow the movement of benchmarks.
To reiterate, Tianneng is in the right industry, manufacturing the right products, for the right geographical segment. It is a high-growth company with solid historical fundamentals and profitability. The reason supporting our case is that the company has strong government backing for its business, given the Chinese government’s one-track goal of becoming environmentally-friendly.
Furthermore, Tianneng’s main business involves the manufacture of high-end eco-friendly batteries, which has had a strong track record of providing the company with good cash flow. Tianneng also has superior technology for lead batteries supplemented by lithium batteries. Lead batteries have a strong competitive edge compared to alternatives such as nickel-cadmium batteries as they have higher safety, recyclability, and performance. Lead batteries have a leading position in the global rechargeable batteries market and are the most commonly used batteries in vehicles and equipment such as light electric vehicles (EVs), special EVs and start-stop systems in automobiles.
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The growth prospects of these batteries are expected to be strong, as catalysts such as the in-depth application of the 5G mobile network in lead batteries could give them additional features such as identifiability and traceability, remote controllability and connectivity to the Internet of Things (IoT), which describes physical objects that are embedded with sensors and other technologies that exchange data with other devices and systems over the Internet.
In the company’s latest 1HFY2021 ended June 30, 2021 interim report, Tianneng’s revenue increased by 60% y-o-y. However, its gross margins dropped from 9.3% to 5.3%, which led to a decline of 8.6% for its earnings. Tianneng’s operating cash flow turned negative from the previous year, mostly because of the increase in inventories and accounts receivables.
As a result, Tianneng’s share price was hit significantly, as the company has had a long record of positive operating cash flow and free cash flow. Looking deeper into these figures, for inventories, raw materials roughly increased by 40%, work in progress by almost 50% and finished goods by 20%. This indicates that the increase in inventory was not mainly caused by finished goods that are unable to be sold, but mostly work in progress and raw materials.
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The increase in accounts receivables reflect that the company’s capacity to collect cash for products and services sold is eroding, but it does not mean all receivables will be lost, it merely denotes payment at a later date which will improve the company’s cash flow standing. The business in itself — on the demand front — is still very much profitable, and a 50% drop in share price from six months ago is overdone. Once the company posts positive cash flow, the share price will rebound sharply.
Moving forward, the company intends to further focus on developing its lithium-ion battery business while adhering to green, low carbon requirements. Tianneng also intends to widen the application fields of lead batteries through expanding segments such as start-stop and smart energy storage on the basis of consolidating its leading position in lead motive batteries, and strive to develop its business in China and overseas.
Chart 1 illustrates the company’s profitability, reflected by its return on equity and assets, which has been mostly strong. In terms of financial safety, the company has a current ratio of 1.5 times, and is net cash, implying that the company will unlikely face any liquidity or solvency related issues in the near future. Domestically, Tianneng is one of the cheaper companies compared to peers, as it trades at a 83%, 81% and 71% discount for its forward P/E, forward Ebitda and P/B ratios respectively. Globally, these figures are 82%, 92% and 79% discounts respectively for the given valuation ratios.
Sentiments-wise, there are four “buy” calls, one “hold” call and no “sell” calls on the company from analysts. The average target price for the company is around 60% above its current trading price of HK$8 ($1.38). This stock is trading at a great bargain, and we think that stock is worth at least twice its current trading price based on in-house valuations. This stock is suitable to investors with a medium risk profile seeking beaten down growth companies.
