Highpower International — NASDAQ:HPJ

About Highpower International

Highpower International, Inc. is a clean energy company, which focuses on developing, manufacturing, and marketing of nickel-metal hydride and lithium-ion rechargeable batteries and related products for both consumer and industrial applications. It operates through the following segments: Lithium Batteries, Ni-MH Batteries, and New Materials.

The Lithium batteries segment includes general type, high and low temperature and high drain lithium-ion rechargeable batteries, and batteries for digital products. The Ni-MH Batteries segment covers general type, ready-to-use, high and low temperature, and high drain nickel-metal hydride rechargeable batteries. The New Materials segment recycles and process certain used battery products and raw material scraps collected from the battery manufacturing industry.

The company was founded in 2001 and is headquartered in Shenzhen, China.

$3.94
Entry Price
$4.20
Share Price
+7%
Trade Return
494
Trade age — days

Overview

This is an interesting company. They produce battery solutions for portable electronic devices and have contracts with companies such as Samsung. They also produce the battery system for controllers of the DJI drone with an aim to produce the battery system of the drone itself.

The current valuation is attractive and the world will only need more batteries – however there are some important risks with this investment, more so than with other recommendations.

Some relevant quotes from the company management in the recent conference call transcripts:

With our solid product reputation and business foundations in the industry, we are confident that we will be able to maintain our strong growth momentum and continue to develop our business for years to come.

We continue to witness accelerated demand for high quality lithium batteries as the demand for energy far exceeded [ph] smart verbal devices and other smart portable products surged globally.

We are extremely encouraged by our robust results and believe that we will continue to grow our top line and expand our market share in this emerging market segment with tremendous growth potential.

Latest investor presentation

Growth Drivers

  • Growth from smart portable products
  • Energy storage systems
  • Filling niche battery storage requirements for new digital products
  • Chinese government pushing for increased local production of lithium ion battery storage

Quote from management:

Importantly, growth in our lithium ion batteries business, including battery solutions, continued to accelerate driven by demand for energy storage systems, smart wearable devices, and other digital products.

Risks

  • Chinese company
  • Margins will fluctuate based on raw material costs. May be higher in coming quarters.
  • Small cap stock so subject to volatility
  • Battery production is ramping up globally (Tesla and others), which may push down margins in the future.
  • Company is looking to raise funds to expand manufacturing capacity and growth.

Valuation Metrics

We have calculated a 12m forecast EPS of $0.68 - based on 4x last quarter, which is probably conservative.

  • YoY sales increasing at 40%
  • Full year EPS growth is >100%
  • Current forward PE is 7 (based on EPS $0.68)

Considering the sales and EPS growth, but also allowing for the small company size a PE ratio of 30 seems appropriate value at this stage.

This gives a price closer to $20.40 an increase of 330% on the current price.

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Stock notes

20 Jul 2017

Huge earnings growth continues - Q2 2017 preliminary results

HPJ have today announced preliminary Q2 2017 earnings, hot on the heals of announcing two new partnerships in the smart vacuum space.

Key points:

  • Net sales $50.0 to $52.0 million, a 36% to 42% increase
  • Gross profit $11.0 to $12.0 million, a 44% to 58% increase from $7.6 million
  • Net income $3.5 to $4.1 million range, a 66% to 95% increase

Valuation:

We previously stated:

We have calculated a 12m forecast EPS of $0.68 - based on 4x last quarter, which is probably conservative.

That certainly is too conservative given the latest quarterly results.

Q1 EPS was $0.17 and Q2 looks to be approximately $0.25 putting the company on first half EPS of $0.42. Considering Q3 is typically HPJ’s strongest, followed by Q4 it’s quite possible the full year earnings could approach $1.00.

Working off a conservative estimate of $0.80 earnings for the full year. At todays close, that puts the company on a PE of 5.1 with income growing well over 50% annually.

HPJ won’t last at this price for long, especially with a very small float.