This week is a busy week with three potential superstocks. If you are not into "sin stocks" like GDEN that I covered in my first s...

Weekly Superstock Scan 20 Mar 2017 - 24 Mar 2017 (2/2): Highpower International, Inc. (HPJ)

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This week is a busy week with three potential superstocks. If you are not into "sin stocks" like GDEN that I covered in my first superstock post of the week, you can consider the second superstock of the week - Highpower International, Inc (HPJ).



HPJ was founded in 2001 and produces Nickel-Metal Hydride (Ni-MH) and lithium-based rechargeable batteries used in a wide range of applications such as electric bikes, energy storage systems, power tools, medical equipment, digital and electronic devices, personal care products, and lighting, etc.

Technical



HPJ has been trading between $2 to $3 for almost the whole of 2016-2017. Last week, the share price of HPJ surged from $2.70 to $4 before closing at $3.65 for the week. The volume for the week is approximately three times its average weekly trading volume.

The cause for the steep surge in price was the release of preliminary financial results in advance of its participation in an upcoming investor conference and prior to meetings with existing and potential shareholders in the United States.

This practice is something new to me since HPJ is scheduled to release its results only at the end of the month. Since the results are positive, it does make sense to release it early as a selling point during the conference.


Fundamental



Including the preliminary results released last week, HPJ has seen four consecutive quarters of EPS growth. The increase is attributed to the strong growth of Lithium Business over the past five years.

Acquisition of Huizhou Yipeng Energy Technology Co. Ltd

HPJ entered into an agreement with Yipeng to acquire up to 50% equity interest, with a right to purchase in the future an additional 1% of the shares from Yipeng's founding shareholders which would result in HPJ owning 51% of Yipeng. Yipeng is an  electric vehicle power battery system solutions prrovider specializing in the plug-in hybrid electric vehicle (PHEV) and electric vehicle (EV) bus market in China. The acquisition allowed HPJ to venture into the growing market of EVs.

It is difficult to understand the transcript of the previous conference due to translations, but there were talks of restriction that all the EVs must contain a power batteries from a whitelist. There is no foreign invested companies that can enter the whitelist. Therefore, by co-operating with Yipeng, HPJ is able to enter the Chinese market.

Growing Lithium Business

There is a very big acceleration of lithium business in 3Q FY2016. By big, we are talking about a year on year increase of 103%. And the y-o-y increase remains strong in 4Q FY2016. When asked by an analyst during the result conference, the management explained that the growth is attributed to multiple customers because of HPJ's recent better products.

The management has added that HPJ has dedicated significant time and resources to expand the R&D efforts to ensure that the company is at the forefront of providing state-of-art lithium battery technology to the market.

Matrices
+ Relative low P/E - HPJ is trading at approximately 9 times its trailing twelve months earnings, including the preliminary 4Q FY2016 results.
- High float/volume ratio - Although HPJ has a low float of 8.2 million shares, its average volume is just 68,000 shares, putting the float/volume ratio at around 120.


Risk Factors/ Things I do not like


  • Falling price and margin - Portable consumer electronic devices are subjected to rapid declines in average selling price and manufacturers expects suppliers to cut their cost and lower  the price of products. As a result, HPJ has previously reduced the price of some of the battery products and expect to continue to face market-driven downward pricing pressures in the future.
  • Ending of Subsidy for x-electric vehicle in China - The Chinese government originally plans to gradually reduce the subsidy rate for xEV purchase over the 2016~2020 period, and the program will officially end after 2020. xEV battery demand is expected to weaken and its pressure on the IT cell capacity will start to ease.


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