RightEdge Analytics

About the Author RightEdge Analytics

I am a fund analyst seeking heavily undervalued small cap stocks for long term investment. If the opportunity presents itself I will also play the short side on companies that I feel are heavily overvalued.

Highpower: A Potential Green Multi-Bagger


Background:

Highpower International (NASDAQ:HPJ) is a manufacturer of portable electronic devices for both the Chinese and worldwide markets. HPJ makes A, AA, AAA batteries for the consumer market as well as chargers and battery packs for electric bikes, power tools, industrial batteries, and electronic toys. HPJ also manufactures lithium-ion batteries for original equipment manufacturers that are used in laptops, digital cameras, cell phones, and tablets.

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Source: HPJ Investor Presentation

New recent announcements show large demand in diverse markets:

On June 18, 2014 Highpower announced a deal to deliver Ni-MH rechargeable batteries to Costco (NASDAQ:COST). These batteries will be sold from Costco directly to consumers for use as a supplemental energy source within solar-powered light products. This trial order from Costco could burgeon into a large deal if the product is successful. Costco currently operates 663 warehouse locations and boasts an annual revenue of $105.2 billion. This deal is another huge market for Highpower and another big step into the US market.

On July 16, 2014 the government of Shenzhen announced an over $600,000.00 funding of Highpower for the development of in-house off the grid home energy storage system products. This government backed project will meet the needs of commercial and residential power systems. The intended use for these devices will be as primary power sources for homes and businesses or as backup power for hospitals. The government’s commitment to Highpower demonstrates the confidence that Shenzhen has in the quality of these products and this company’s future.

On September 3, 2014 Highpower announced that its 4600 mAh lithium battery will be implemented in the Acer (OTC:ACEIY) Iconia Tab 8. This is a large deal for Highpower, as Acer is the number four producer of personal computer devices in the world. With success in this tablet, Acer will most likely continue to use Highpower as a primary supplier of power-source components within their other devices. In addition, this deal will reinforce Highpower’s reputation as a superior battery producer and lead other computer device companies to implement the use of Highpower batteries within their products.

On October 1, 2014 Highpower announced that it is providing a Ni-MH rechargeable battery for the VTech (OTC:VTKHF) children’s tablet. While this may not seem like a deal that will be as influential as the Acer contract, this endeavor with VTech demonstrates the diversity of Highpower’s product line.

Huge opportunity: Electric Buses in China

On August 27, 2014 Highpower announced that its 20aH lithium-ion battery has received approval by China’s National Quality Control & Inspection Center for Buses. This is a huge milestone for Highpower’s initiative to become the leading producer of lithium batteries for China’s electric buses. In the next decade, China will have more electric buses than any other nation in the world. It has been projected by Pike Research that lithium-ion driven buses will experience a 57% CAGR by 2018.

“By 2018, it is perhaps not surprising that battery electric buses will drive the most demand for Li-ion batteries. Since battery buses are expected to be almost 100% powered by lithium ion, and they require much larger batteries than hybrids, this market offers the greatest growth potential. It is expected that Li-ion battery capacity for battery buses will grow from 69,472 kWh in 2012 to over 1 million kWh in 2018, a 57% CAGR.”

-“Electric Drive Buses” from greencarcongress.com

Diverse Revenue Streams

Highpower’s expansive and diverse product line should insulate the company from the risk of any single product within their line failing. Some of the most basic products offered by Highpower, AA and AAA batteries, are used to power millions of products and serves as a stabilizing point for the company within the consumer electronics market. This market can be defined as a “cash cow” for Highpower. These revenues are very consistent and can be counted on from quarter to quarter. In the expanding Chinese market, electric consumer product sales continue to rise, increasing the demand for these consumer batteries.

Highpower’s expansion into electronic vehicles could be a huge revenue driver for the company in the future. As covered earlier in the article we see their movement into electronic buses as a potential game breaker for Highpower. The growth in this segment could transform HPJ from a $100 million company to a multi-billion dollar company. The Chinese market also has a huge demand for electric bikes. It accounts for about 92% of the e-bike world market, or about 28 million units.

Mobile devices are another large market for Highpower products. Highpower’s batteries can be integrated into tablets, smartphones, wearable devices, Bluetooth products, and mobile payment terminals. Highpower is making great headway in this market recently booking the deals described earlier with Acer and Vtech. They have also booked a new battery deal with Timex for a wearable GPS smart watch.

The final market that Highpower seeks to exploit is the solar energy storage market. They are also making progress in this market through a funding from the government. Confidence has been shown in Highpower to develop solar energy storage solutions for the commercial and residential sectors.

Screen Shot 2014-10-07 at 11.42.34

Source: HPJ Investor Presentation

High End Clientele

Highpower has an influential and impressive customer base, and many of these companies have the capacity to place an order that could potentially double the revenues of Highpower. This strong customer base again shows that Highpower has consistently provided products of superior quality, and this performance has not gone unnoticed by some of the largest companies in the world. Highpower’s customers include:

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Source: HPJ Investor Presentation

Highlights from the Second Quarter:

  • Net sales increased by 22.3% over Q2 of 2014.
  • Lithium batteries sold increased by 28.8% while net sales on lithium batteries increased 42% due to improving margins on lithium.
  • Non-GAAP net income increased 756.9% over the same quarter last year to $0.09 per share from $0.01 per share.
  • Revenue guidance for 2014 was reaffirmed between $150 million to $170 million.

Risks

Investments in small cap companies never come without risk. We feel that there are a few risks with investing in HPJ, but the likelihood of these risks coming to fruition is very minimal. The first common risk with HPJ and other small cap stocks is a secondary offering. Currently with a low float of 8.78 million HPJ could file a secondary offering to raise capital and in turn dilute shares. We find this unlikely as we do not see any needs for HPJ to raise capital.

Financials

When analyzing Highpower we decided to compare financial metrics with its competition. The two best comps that we could find were Ultralife Inc. (NASDAQ:ULBI) and China BAK Battery Inc. (NASDAQ:CBAK). These two comparable companies produce many of the same battery products. CBAK is a direct competitor in the Chinese market and ULBI competes in the American market that Highpower is breaking into. HPJ is approximately double the size of both of these companies due to a larger product line, however, we feel that these comps give the best picture of the financial situation that HPJ is currently in.

Screen Shot 2014-10-07 at 11.42.51

Highpower is a Multi-Bagger

Based on EPS, P/S, and Revenue growth metrics, Highpower is significantly undervalued when compared to peers. Based on an average of the metrics when compared to CBAK, HPJ is worth about $64 per share, and when compared to ULBI, HPJ is worth a lofty $218 per share. While we do not believe that HPJ can reach these numeric based price targets, we assign a fair value estimate of $24 per share. This is based on a fundamental and market analysis incorporating our numeric valuations.

Screen Shot 2014-10-07 at 11.43.00

Conclusion:

Based on our in-depth analysis, we believe that HPJ is highly undervalued at its current price. We assign a twelve month price target of $24 a share or about three times current levels. Highpower is a company that is gaining strength within an expanding market that serves an impressive customer base. Recent deals have shown that Highpower provides the quality and innovation required by “big players” for their top-of-the-line products, and this is what will make Highpower successful as they continue to expand within this market.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst RightEdge Analytics has a total average return of -0.2% and a 50% success rate. RightEdge Analytics is ranked #2537 out of 3877 bloggers.

 

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