Despite the apparent maturity of this week’s gamble’s main product set, its turnover has been growing rapidly.
China Shoto (Aim:CHNS)
China Shoto is a leading Chinese manufacturer of lead acid batteries, with a factory near Shanghai and a research and development laboratory in Nanjing. The group originally floated on Aim at a price of 130p back in December 2005.
Despite the apparent maturity of its main product set, turnover has been growing rapidly. Sales of backup power units to the booming telecoms industry are up 50%, while sales of traditional batteries to industrial customers are growing at an impressive 40% a year clip. Overall first-half turnover jumped 46.5% to £41.6m, delivering earnings per share of 12.3p, up 22% on last year.
Demand is being driven by the five major local telecoms providers (including China Mobile, China Unicom and China Telecom), who are all gearing up for the launch of 3G services – expected before next year’s Beijing Olympics.
This domestic growth has also been supplemented by Shoto winning a landmark $10m contract in October from Reliance Industries of India – its first large-scale overseas order. Production of traditional batteries has been ramped up from 18,000 to 24,000 units a day, to satisfy the booming electric bicycle sector. Engineering head Simon She expects continued strong growth as 18 million electric bicycles are being made in China each year.
The three main challenges facing the business are higher raw materials (ie, lead) costs, tougher competition and a weaker renminbi against the pound. However, lead prices have eased recently, while selling prices have risen. As for the renminbi, I believe that – under intense political pressure from the US and Europe – it will move higher next year as China’s government eventually eases the currency’s peg against the dollar.
Another risk is that net debt (£13.8m as at the end of June) is uncomfortably high, but this is expected to fall by December. Indeed, as a sign of its positive second-half cash flows, the board said at a trading update last week that it would recommend a final dividend of 4.5p per share (representing a 3.2% yield). The directors “are confident that the outturn for 2007 will be in line with market expectations”.
House broker Seymour Pierce expects turnover and underlying earnings per share of £80m and 22.5p respectively this year, and £95m and 25.5p next. Frankly, like most things Chinese, with the shares on a 2007 p/e ratio of just 6.2, the stock looks incredibly cheap for investors happy to take a risk.
Recommendation: SPECULATIVE BUY at 137.5p (market capitalisation £32m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments