China Shoto is a prospect to phone home about.
Battery manufacturer China Shoto (LSE: CHNS) has shown remarkable growth over the past few years. Since 2004, revenues have risen almost tenfold, from £18.7m to £183m. Pre-tax profits have shot up from £1.8m to £11.6m.
For 2009, house broker Seymour Pierce estimates the firm will deliver a pre-tax profit of £12.5m on revenues of £200m.
Latest results
China Shoto's latest set of interim results for the six months ending 30 June 2009 showed revenues up 41% at £96m while pre-tax profits increased 48% to £6.4m.
Revenues from the sale of back up batteries account for the vast majority of sales (over 93% in this instance). These back up batteries are used to power telecom masts in the event of grid power failure and are higher margin than the company's 'power' type batteries used in electric scooters.
You won't be surprised to hear that China Shoto's main customers are various subsidiaries or branches of all three of China's telecommunication operators (China Mobile, China Unicom and China Telecom). Indeed, nearly 90% of total sales come from these firms.
China's GDP grew by 7.1% during the first six months of 2009, driven by the Chinese Government's £375bn economic stimulus package. This saw massive investment in new domestic infrastructure projects. That's obviously great news for companies like China Shoto.
However, the current market value is just £48m. Despite the company's tremendous promise, there are some areas of concern.
The disappearing dividend
Surprisingly, given the strength of these interim results, China Shoto revealed that it would not be paying an interim dividend as it is conserving cash for a planned battery recycling plant.
The plant will enable up to 100,000 used batteries to be recycled each year. The key driver is an effort to improve its environmental credentials in the face of stricter 'green' tendering requirements from customers, as well as savings that it will make on raw materials.
Observers believe the plant will cost in the region of £20m and be fully operational by 2011 -- although this date may be a conservative estimate, given the pace of development in China.
That said, given that last year's interim dividend payment of 1.5p cost the company just £350,000 and it has £20m in net cash, this decision seems strange. It possibly indicates potential cash flow problems, or at least the fear of them. Looking at the most recent cash flow statement, £12.8m flowed out of the business during the last six months.
China Shoto itself alluded to this by referring in its interims to a "change in certain clients' payment delivery times during this current year due to global economic conditions". A spokesperson for the company explained that it was "confident it will be over that glitch" and will look again at resuming a dividend payment at year end.
Valuation
China Shoto's share price has dropped recently and is around 210p. This puts it on a prospective PE ratio of 4.5. It certainly seems an attractive prospect and this dip may well be a good buying opportunity.
In a note issued in September, Seymour Pierce appeared confident that China Shoto would pay a 5p full-year dividend (which would give a prospective yield of 2.4%). Still, the cautious might want to investigate a little further and wait to see if it does resume a dividend payment at year end before committing themselves.
In any case, this is certainly one company worth keeping an eye on. For more on this company, you can also read this review of its 2009 AGM.
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