New Energy Systems NEWN
February 01, 2010 - 8:38am EST by
oliver1216
2010 2011
Price: 6.85 EPS nm $1.23
Shares Out. (in M): 13 P/E nm 5.6x
Market Cap (in $M): 86 P/FCF nm 5.6x
Net Debt (in $M): 2 EBIT 0 0
TEV ($): 88 TEV/EBIT nm nm

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Description

 

NEWN is an undiscovered, undervalued (trades at 5.6x 2010E EPS), rapidly growing company that has a healthy balance sheet, very conservative earnings guidance and operates in a highly attractive industry.  The stock has recently traded off significantly as a result of the sell off in all China related stocks.  However, I think the sell-off in this stock is clearly overdone. 

Based in China, NEWN is a leading manufacturer and distributor of lithium ion batteries.  The batteries are used to power personal electronic devices (mobile phones, mp3 players, laptops, etc).  Currently, virtually all of the company's products are used by Chinese consumers, which means the company has significant opportunities to expand into new, large markets such as the USA.     

NEWN is undiscovered because it has no sell-side analyst coverage and prior to its recent, short visit to Boston and NYC, management had never met with US investors.  The company also does not have any large institutional investors who would be motivated to help "tell the story."  Perhaps the biggest reason the company remains undiscovered is that it recently completed two major acquisitions, so anyone valuing the company on an LTM basis may miss this stock.  These acquisitions were strategically important because they helped the company significantly increase its revenue and profitability, vertically integrate and expand into higher margin businesses.  In acquiring these two companies late last year, NEWN spent almost $60mm.  The acquisitions were funded primarily by issuing stock to the sellers but also by paying them approximately $13 million in cash.  This cash had represented a meaningful portion of the company's market capitalization and had been generating very little net income.  Therefore, the acquisitions, which were made a very attractive prices, will be highly accretive even though the company issued additional shares.  Importantly, even though the company spent a lot of its cash on these acquisitions, pro forma for these acquisitions NEWN has a healthy balance sheet and continues to generate free cash flow.  Therefore, the company does not need to issue equity.  It is also bullish that the parties who sold their companies to NEWN elected to accept NEWN stock as a significant component of their total consideration (and have no plans to sell their stock) which reflects the sellers' confidence in NEWN's future.

 

Management recently provided 2010E EPS guidance of at least $1.23 (excluding any non-cash charges resulting from the acquisitions) and 2010E revenue guidance of $89 million.   Management recognizes the importance of "under-promising and over-delivering" so I would not be surprised if EPS ended up being significantly higher than guidance.  Importantly, this guidance does not assume any international orders which, if won, would significantly increase NEWN's profitability and credibility (and thus its EPS multiple).   Last week the company announced a European distribution agreement valued at over $3mm which presumably was not included in its original guidance of $1.23. 

Stock prices are a function of supply and demand.  I think demand for NEWN's stock will increase because it appeals to a variety of investor groups.  At current prices, the stock is trading at only 5.6x 2010E EPS which is an attractive price for value investors who will also appreciate NEWN's healthy balance sheet and free cash flow.  Growth investors will also be attracted to this stock because of its significant historic and projected growth.  Finally, investors who buy stocks in anticipation of their being uplisted from the OTCBB to a national exchange (a strategy that was very profitable last year) will like the fact that NEWN expects to submit its application to a national exchange by late Q1 or early Q2. 

 

Obviously NEWN's end market is very attractive since more people are buying portable electronic devices and new devices are being introduced all the time.  China is one of the largest consumers of lithium ion batteries and the government expects the market to grow 20% annually over the next eight years.  However, NEWN's business in China should grow faster than the overall market.  Furthermore, NEWN has attractive opportunities to grow its international business, especially in the USA.  Importantly, the company has significant excess capacity which will enable it to grow without incurring meaningful capital expenditures. 

Understanding NEWN today requires some analysis as a result of the company's two recent acquisitions.  However, in an 8k filed on January 5th, (

http://www.sec.gov/Archives/edgar/data/1144320/000121390010000035/f8k111609ex99i_newenergy.htm ), the company lays out its capitalization pro forma for the acquisitions: 

 

 

PF Shares outstanding                        12.6 million

Stock price (1/30/2010)           $6.85

Market capitalization              $86.3 million

 

Cash                                        $3.3 million

Debt                                        $5.2  million

Enterprise value                   $88.2 million

 

 

There are clearly some risks associated with this investment: 

 

  • 1) Management is quite capable, highly motivated and are large shareholders. However, they are still learning how to operate as a U.S. listed company and how to deal with U.S. investors. Clearly management will be going through a bit of a learning process, but I believe they can handle it.
  • 2) The company has made two significant acquisitions and with any acquisition comes some risk. However, integrating the acquisitions should be relatively easy as there will not be any headcount reductions or plant closures; and,
  • 3) The company is growing very quickly and could suffer some "growing pains."

 

 

Catalyst

  • 1) Increased investor awareness - Management is committed to increasing its awareness among the investment community. They have hired an I.R. firm, recently completed a short, East Coast trip to meet investors and sell-side analysts and will likely be back in the US in the near future. Management also will likely present at several investor conferences this year. Management is also actively trying to get sell-side analyst coverage, although that can often be challenging.
  • 2) Once the company gets uplisted from the OTCBB, many institutional investors will be able to buy the stock.
  • 3) The release of quarterly results during 2010, which should show year over year revenue and EPS growth.
  • 4) Indications from management that the integration of the acquisitions is proceeding as planned.
  • 5) Indications from management that 2010 EPS guidance is easily achievable, and,
  • 6) Any announcements of big orders from U.S. customers.

 

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    Description

     

    NEWN is an undiscovered, undervalued (trades at 5.6x 2010E EPS), rapidly growing company that has a healthy balance sheet, very conservative earnings guidance and operates in a highly attractive industry.  The stock has recently traded off significantly as a result of the sell off in all China related stocks.  However, I think the sell-off in this stock is clearly overdone. 

    Based in China, NEWN is a leading manufacturer and distributor of lithium ion batteries.  The batteries are used to power personal electronic devices (mobile phones, mp3 players, laptops, etc).  Currently, virtually all of the company's products are used by Chinese consumers, which means the company has significant opportunities to expand into new, large markets such as the USA.     

    NEWN is undiscovered because it has no sell-side analyst coverage and prior to its recent, short visit to Boston and NYC, management had never met with US investors.  The company also does not have any large institutional investors who would be motivated to help "tell the story."  Perhaps the biggest reason the company remains undiscovered is that it recently completed two major acquisitions, so anyone valuing the company on an LTM basis may miss this stock.  These acquisitions were strategically important because they helped the company significantly increase its revenue and profitability, vertically integrate and expand into higher margin businesses.  In acquiring these two companies late last year, NEWN spent almost $60mm.  The acquisitions were funded primarily by issuing stock to the sellers but also by paying them approximately $13 million in cash.  This cash had represented a meaningful portion of the company's market capitalization and had been generating very little net income.  Therefore, the acquisitions, which were made a very attractive prices, will be highly accretive even though the company issued additional shares.  Importantly, even though the company spent a lot of its cash on these acquisitions, pro forma for these acquisitions NEWN has a healthy balance sheet and continues to generate free cash flow.  Therefore, the company does not need to issue equity.  It is also bullish that the parties who sold their companies to NEWN elected to accept NEWN stock as a significant component of their total consideration (and have no plans to sell their stock) which reflects the sellers' confidence in NEWN's future.

     

    Management recently provided 2010E EPS guidance of at least $1.23 (excluding any non-cash charges resulting from the acquisitions) and 2010E revenue guidance of $89 million.   Management recognizes the importance of "under-promising and over-delivering" so I would not be surprised if EPS ended up being significantly higher than guidance.  Importantly, this guidance does not assume any international orders which, if won, would significantly increase NEWN's profitability and credibility (and thus its EPS multiple).   Last week the company announced a European distribution agreement valued at over $3mm which presumably was not included in its original guidance of $1.23. 

    Stock prices are a function of supply and demand.  I think demand for NEWN's stock will increase because it appeals to a variety of investor groups.  At current prices, the stock is trading at only 5.6x 2010E EPS which is an attractive price for value investors who will also appreciate NEWN's healthy balance sheet and free cash flow.  Growth investors will also be attracted to this stock because of its significant historic and projected growth.  Finally, investors who buy stocks in anticipation of their being uplisted from the OTCBB to a national exchange (a strategy that was very profitable last year) will like the fact that NEWN expects to submit its application to a national exchange by late Q1 or early Q2. 

     

    Obviously NEWN's end market is very attractive since more people are buying portable electronic devices and new devices are being introduced all the time.  China is one of the largest consumers of lithium ion batteries and the government expects the market to grow 20% annually over the next eight years.  However, NEWN's business in China should grow faster than the overall market.  Furthermore, NEWN has attractive opportunities to grow its international business, especially in the USA.  Importantly, the company has significant excess capacity which will enable it to grow without incurring meaningful capital expenditures. 

    Understanding NEWN today requires some analysis as a result of the company's two recent acquisitions.  However, in an 8k filed on January 5th, (

    http://www.sec.gov/Archives/edgar/data/1144320/000121390010000035/f8k111609ex99i_newenergy.htm ), the company lays out its capitalization pro forma for the acquisitions: 

     

     

    PF Shares outstanding                        12.6 million

    Stock price (1/30/2010)           $6.85

    Market capitalization              $86.3 million

     

    Cash                                        $3.3 million

    Debt                                        $5.2  million

    Enterprise value                   $88.2 million

     

     

    There are clearly some risks associated with this investment: 

     

     

     

    Catalyst

     

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