Leoch International (842 HK) - Oriental Patron International (842 HK... · Equity Research Leoch International (842 HK) ... Competitive Analysis ... The company is gaining more giants

Fri, 02 Sep 2011

Equi ty Research Leoch International (842 HK) Bat tery/ China

Young and growing

Best positioned for opportunities ahead. Ministry of Environmental

Protection launched environmental inspection for lead acid battery and

closed ~60-70% capacity in China. Leoch is least affected as judged by (1)

least affected capacity among HK listed peers and (2) 100% self-sufficiency

of lead electrode plates, vs Tianneng’s 70% & Chaowei’s 85%.

Cooperating closely with giants. Leoch has been working with high quality

client like GS Yuasa, Jaguar, BMW, Mattel, etc. And the company is

increasingly recognized by more world renowned brand like Pep Boys and

Suzuki. We expect the company to gain more exposure for other famous

brand in the future.

Diversified product portfolio, plus upside in China’s motive batteries

market. Unlike other local listed players, Leoch possesses a full range of

battery products on reserve battery, SLI battery and motive battery. The

company targets to expand its exposure in China from currently 46% to 60%

by 2012-13.

Recommend BUY, with target price HK$4.9. We view Leoch as a young

and growing enterprise, who is well positioned to grasp opportunities arisen

from recent environmental inspection. We recommend BUY on Leoch, with

target price at HK$4.9. Our TP implies 7x FY12PE, representing 13%

discount to our 8x target valuation of Tianneng and Chaowei, balancing

between better production facilities but higher execution risk in Leoch’S SLI

and motive power batteries business. The TP valuation is at the lower-end of

the past trading range, which we think is conservative given its 79%

estimated NP CAGR in the next three years.

Antony Cheng

Senior Analyst

+852 2135 0206

[email protected]

Initial Coverage

BUY UNCHANGED

Close price: HK$3.52

Target Price: HK$4.90 (+39%)

Prior TP: NA

Key Data

HKEx code 842

12 Months High (HK$) 5.36

12 Month Low (HK$) 2.95

3M Avg Dail Vol. (mn) 1.65

Issue Share (mn) 1,333.33

Market Cap (HK$mn) 4,693.34

Fiscal Year 12/2010

Major shareholder (s) Dong Li (75.0%)

Source: Company data, Bloomberg, OP Research Closing price are as of 2/9/2011

All figures are subject to rounding

Price Chart

-50

-40

-30

-20

-10

0

10

No

v/1

0

Jan

/11

Mar/

11

May/1

1

Jul/11

%842 HK MSCI CHINA

PE

0

2

4

6

8

10

12

14

Jan

/11

Feb/1

1

Mar/

11

Ap

r/11

May/1

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Jun

/11

Jul/11

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/11

Forward P/E Ratio

+1std.

avg.

-1std.

Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E

Revenue 1,340.3 2,054.0 3,642.5 5,933.6 8,126.8

Growth (%) (9.7) 53.3 77.3 62.9 37.0

Net profit 94.1 194.6 444.6 775.8 1121.7

Growth (%) 56.4 106.9 128.5 74.5 44.6

Diluted EPS (HK$) 0.085 0.175 0.401 0.699 1.011

Change to previous EPS (%)

NA NA

Consensus EPS (HK$)

0.398 0.605

EPS growth (%) 56.8 106.9 128.5 74.5 44.6

ROE (%) 18.9 9.4 18.1 24.9 27.6

P/E (x) 41.5 20.1 8.8 5.0 3.5

P/B (x) 7.9 1.9 1.6 1.3 1.0

Yield (%) 0.0 0.0 1.7 3.0 4.3

DPS (HK$) 0.000 0.000 0.060 0.105 0.152

Source: Bloomberg, OP Research

Fri, 02 Sep 2011

Leoch International (842 HK)

Page 2 of 25

Table of Contents

1H11 results review ...................................................................................................................................... 3

Diversified product portfolio, plus upside in China’s motive batteries market ................................................ 4

Benefit from powerful customer base. .......................................................................................................... 6

Best environmental standard, least affected by the closure .......................................................................... 8

Valuation .....................................................................................................................................................10

Financial Summary ..................................................................................................................................... 11

Competitive Analysis ...................................................................................................................................12

Appendix I: What is lead acid battery ..........................................................................................................15

Appendix II: China lead the market .............................................................................................................17

Appendix III: Lead acid battery is a preferred choice ...................................................................................18

Appendix IV: Reserve power benefit from various sectors ...........................................................................19

Appendix V: Ride on the fast vehicles for SLI ..............................................................................................21

Appendix VI: E-bike helps motive power battery .........................................................................................22

Fri, 02 Sep 2011


Page 3 of 25

1H11 results review

Strong interim result released. Leoch released interim results on 23 Aug.

Revenue increased 63.9% YoY to RMB1,547.6mn due to robust growth in sales of

reserve power batteries and in domestic demand in China. Besides, gross profit

and net profit rose substantially by 47.5% and 43.7% YoY, respectively, at almost

the same level. However, gross margin and net margin decreased by 2.59ppt and

1.65ppt YoY mainly due to rise in labour cost.

Exhibit 2: 1H11 segmental revenue breakdown

46.9%

22.2%

1.3%

16.5%

8.1%

0.9%

46.0%

21.8%

2.1%

13.5%11.5%

4.1%

0%

10%

20%

30%

40%

50%

UPS Telecom Renewable Consumables SLI Motive Power

1H10 1H11

Source: Company

Benefited from regulations. As the largest and well prepared reserve power

supplier in China, Leoch benefited from the tightening environmental regulations.

Since most of the lead-acid batteries producers in China were in suspension and

trying to fulfill the requirements of new policies, Leoch got the opportunity to

expand its domestic market. 46.5% of 1H11 revenue was generated in China and

doubled the revenue in China during 1H10.

Product category favored by market. The major composition of 1H11 sales is

reserve power batteries, the same as last year, and sales of SLI batteries and

motive power batteries increased by 3.4ppt YoY. Considering the revenue

breakdown by products, which is 83.5% reserve power batteries, 11.5% SLI

batteries, 4.1% motive power batteries and 0.9% other products, Leoch is holding

quite diversified products which would meet the needs of the market.

Exhibit 3: Interim Results Summary

(RMB mn) 1H11 1H10 yoy 2H10 hoh Comment

Revenue 1,548 944 63.9% 1,172 32.0% High domestic demand and suspension of other producers.

Gross profit 361 245 47.5% 281 28.6%

Gross margin (%) 23.34 25.93 -2.59ppt 23.95 -0.61ppt Increased labor cost.

Net profit 182 127 43.7% 130 40.9%

Net margin (%) 11.79 13.45 -1.65ppt 11.05 0.74ppt Highest net profit margin among listed peers

Source: Company, OP Research

Fri, 02 Sep 2011


Page 4 of 25

Diversified product portfolio, plus upside in China’s motive batteries market

Diversified product range, less cyclical risk than peers. Unlike other local

listed players, Leoch possesses a full range of battery products on reserve battery,

SLI battery and motive battery. Within the reserve battery category, Leoch is

well-diversified in the telecom and UPS (mainly sold as server batteries in

commercial buildings) markets, with business in motive power coming along as

one of the growth engines.

Since part of its demand came from infrastructural facilities (i.e. telecom station)

and from financially-solid clients, we think that business of Leoch is less cyclical

than Tianneng and Chaowei which sell their products to small distributors.

Increasing sale from motive batteries, poised for higher exposure in

China

As for its motive power batteries, it is building sales and service offices which are

close to customers. In China, it has 11 battery shops.Having satisfied stringent

standards of overseas clients, Leoch targets to expand its exposure in China from

currently 46% to 60%.

Exhibit 4: Diversified product portfolio with high growth in motive power

0

2,000

4,000

6,000

8,000

10,000

FY10A FY11E FY12E

UPS Telecommunications

Renewable energy storage Other consumer and industrial products

SLI Motive power

Sales Volume ('000 Ah)

Reserve

power

Reserve

power

Reserve

power


Fri, 02 Sep 2011


Page 5 of 25

Exhibit 5: 1H11 geographical revenue breakdown

38.3%

20.4% 19.3%17.7%

4.3%

46.5%

18.9% 16.7%13.9%

4.0%

0%

10%

20%

30%

40%

50%

China Europe Asia Ex-China USA Other

1H10 1H11

Source: Company

Fri, 02 Sep 2011


Page 6 of 25

Benefit from powerful customer base.

Cooperating closely with giants. Leoch built up solid relationship with

worldwide famous companies such as GS Yuasa, BMW, China Unicom, etc. More

than 2000 companies in both domestic and international market are its customers.

In the global market, as the supplier of Eaton, Emerson, BMW, and Mattel, Leoch

gained reputation on technology and innovation. And in domestic market, the

company retained a large market share in telecommunications and UPS

industries since it is the 2nd

largest battery supplier to China Unicom, the 3rd

largest battery supplier to China Mobile and also major supplier of China Telecom

and ZTE. Moreover, the five largest customers contributed to 39% of the group’s

revenue in 2010. The company is gaining more giants into its customer mix, like

Suzuki, Pep-boys.

Exhibit 6: Current customer base of Leoch

Source: Company

Fri, 02 Sep 2011


Page 7 of 25

Exhibit 7: Recent development of Leoch

Dec 2010

• Started building work of our new production bases in Anhui, Zhaoqing and Jiangsu, with total land area of 580,000m2

Jan 2011

• Set up HK headquarter and sales team

Feb 2011

• Completed 30% stake acquisition of MSB

• Selected as a composite stock for Hong Seng Composite Index

Mar 2011

• Included in MSCI Composite Index

May 2011

• Completion of 580,000m2 new production bases construction work

Jul 2011

• Accredited by Haojue

Aug 2011

• JV with ACCPURRO Malaysia

• Accredited by Pep Boys

Source: Company

Fri, 02 Sep 2011


Page 8 of 25

Best environmental standard, least affected by the closure

Closure list announced in Aug 2011. Ministry of Environmental Protection

announced a closure list on lead acid batteries manufacturers on 2 Aug 2011. Out

of 1,930 licensed players, 656 (including 252 on running and 405 received

suspension notice) are in production after recent environmental inspection since

April 2011, which equates to ~60 - 70% capacity closure in 2H11. It reinforced our

view that there will likely be supply shortage of ~40 – 50% in 2H11.

Leoch has the highest safety and environmental standards in the industry…

All production plants of Leoch are approved and continuously monitored by

overseas

… and thus Leoch is least affected. We found that most of Leoch production

facilities were least affected among Hong Kong listed players. Only the packaging

facilities in Shenzhen and Dongguan were suspended. And the production

facilities accounted for 3.5% of total capacity only, vs ~7% for Tianeng, we

estimate.

From now on, it is increasingly hard for new players to come to the market, and

existing players are subject to stringent inspection when they start new plants.

We think Leoch is in the best position gain market share in the current industry

landscape, given their better environmental standards and its continual

monitoring by overseas clients.

Highest self sufficiency for electrode plates under its vertically-integrated

production. Electrode plate production constitutes the majority pollution made,

but it comprises only 10-20% COGS. We believe under recent environmental

inspection, majority of electrode plate manufacturers were suspended and thus

the self sufficiency for electrode plate supply becomes a critical issue to lead acid

manufacturers. Leoch produces 100% of electrode plate it needed; whereas

Tianneng and Chaowei produces only 70% and 85% of electrode plate needed.

Since Tianneng and Chaowei are purchasing electrode externally, they may be

subject to input bottleneck as some suppliers may have closed down due to

environmental issue. Leoch, given its vertically-integrated supply chain, it is not

likely to be affect by the possible supply bottleneck in electrode plats.

Fri, 02 Sep 2011


Page 9 of 25

Exhibit 8: Inspected result from Ministry of Environmental Protection

Leoch International (0842.HK)

Source: Company

Anhui

Guangdong

Jiangsu

Anhui plant is running

Jiangsu plant is running

Plants in Zhaoqing is running;

packaging process is done in

Shenzhen and Dongguan plants

Fri, 02 Sep 2011


Page 10 of 25

Valuation

Recommend BUY, with target price HK$4.9. We view Leoch as a young and

growing enterprise, who is well positioned to grasp opportunities arisen from

recent environmental inspection. The company is now trading at 9x FY11PE and

5x FY12PE. We recommend BUY on Leoch, with target price at HK$4.9. Our TP

implies 7x FY12PE, representing 13% discount to our 8x target valuation of

Tianneng, balancing between better production facilities but higher execution risk

in its motive power batteries business. The valuation is at the lower-end of the

past trading range, which we think is conservative given its 79% estimated NP

CAGR in the next three years.

Fri, 02 Sep 2011


Page 11 of 25

Financial Summary

Profit and loss Cash flow

Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E

Revenue 1,340 2,054 3,642 5,934 8,127 Pre-tax profit (adj.) 109 237 541 944 1,365

Taxes paid (9) (23) (33) (96) (168)

EBITDA ( ex-assoc) 152 303 661 1,099 1,554 Depreciation/amort'n 33 44 95 125 153

Depreciation (33) (44) (95) (125) (153) Associates' adj. 0 0 0 0 0

EBIT( ex-assoc) 118 259 566 974 1,401

Net interest inc/(exp) (10) (22) (25) (30) (36) Gross cash flow 132 258 604 972 1,350

Associates' profits 0 0 0 0 0 Capex (81) (225) (600) (400) (400)

Exceptional items/others 0 0 0 0 0 Change in working cap (171) (569) (409) (841) (805)

Pre-tax profit 109 237 541 944 1,365 Free cash flow (120) (536) (406) (269) 145

Tax (15) (42) (96) (168) (243) Dividends 0 0 (30) (89) (140)

Minority interest (0) 0 0 0 0 Investments (12) (8) 0 0 0

Preference dividends 0 0 0 0 0 Disposals 0 0 0 0 0

Share issues 142 1,583 0 0 0

Net profit 94 195 445 776 1,122 Others (112) (425) 0 0 0

Others 0 0 0 0 0 Net cash flow (102) 613 (436) (358) 5

Dividends 0 0 (67) (116) (168) Net cash (debt) start (28) (130) 483 47 (310)

Net cash (debt) at Y/E (130) 483 47 (310) (305)

Retained earnings 94 195 378 659 953 S'holders' funds + MI 497 2,080 2,458 3,117 4,071

Net debt/equity (%) 26 (23) (2) 10 7

Balance sheet ROE decomposition

Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E FY09A FY10A FY11E FY12E FY13E

Cash & deposits 43 900 564 306 411 EBIT margin (%) 8.82 12.61 15.54 16.42 17.23

Trade debtors 340 585 1,038 1,691 2,316 Pre-tax/EBIT (x) 0.92 0.91 0.96 0.97 0.97

Other debtors 0 0 0 0 0 Net profit/pre-tax (x) 0.87 0.82 0.82 0.82 0.82

Inventories 181 688 911 1,483 2,032 Asset turnover (x) 1.23 0.67 0.93 1.15 1.21

Other current assets 82 274 274 274 274 Assets/equity (x) 2.19 1.48 1.60 1.66 1.65

Intangible assets 3 3 3 3 3 ROE (%) 18.92 9.36 18.09 24.89 27.56

Investment, associates and

Other LT assets 63 71 71 71 71

Fixed assets 379 564 1,068 1,344 1,591 Statistics and ratios

Total assets 1,091 3,084 3,929 5,172 6,698 Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E

Growth rate (%)

Trade creditors 163 345 612 997 1,365 Revenue (10) 53 77 63 37

Other creditors 0 0 0 0 0 EBITDA (ex-assoc) 44 100 118 66 41

ST debt 173 417 517 617 717 EBIT (ex-assoc) 45 119 118 72 44

Other current liabs 257 242 343 442 545 Net profit 56 107 128 74 45

LT borrowings 0 0 0 0 0 Fully diluted EPS 57 107 128 74 45

Deferred taxation and others 1 0 0 0 0 Margins (%)

Other LT liabilities 0 0 0 0 0 EBITDA (ex-assoc) 11 15 18 19 19

Total liabilities 594 1,004 1,471 2,055 2,627 EBIT (ex-assoc) 9 13 16 16 17

Other ratio

Share capital 0 114 114 114 114 Effective tax rate (%) 13 18 18 18 18

Reserves 497 1,966 2,343 3,003 3,956 Dividend yield (%) 0 0 2 3 4

S'holders' funds 497 2,080 2,458 3,117 4,071 Net ROE (%) 19 9 18 25 28

Minorities 0 0 0 0 0 Net gearing (%) 26 (23) (2) 10 7

Total equity 497 2,080 2,458 3,117 4,071 ROA (%) 9 6 11 15 17

Net cash (debt) (130) 483 47 (310) (305) Interest coverage (x) 12 12 23 32 39

Total cap employed 498 2,080 2,458 3,117 4,071 Debtors (days) 93 104 104 104 104

Creditors (days) 44 61 61 61 61

Inventory (days) 49 122 91 91 91


Fri, 02 Sep 2011


Page 12 of 25

Competitive Analysis

Growth path

Past

Sales by product (FY10)

Leoch commenced operation in 1999 and initially focused on the

international market as a leading lead-acid battery exporter. Besides, It

was China's largest exporter of lead-acid battery products in 2009.

Leoch listed on the main board of Stock Exchange of Hong Kong Limited

on 16 November 2010 and became a component stock of the Hang Seng

Small to Mid Cap Composite Index on 7 March 2011.

UPS, 47%

Telecommunications, 24%

Renewable Energy

Storage, 2%

Other Consumer and

Industrial Products, 15%

SLI, 7%

Motive Power, 1% Others, 3%

Present

Sales by market (FY10)

Leoch is the largest lead-acid battery exporter and the largest reserve

power supplier in China. Moreover, it is growing solidly in China's

lead-acid battery market with 2009-2012E CAGR of 18.2%.

China, 42%

U.S., 16%

European Union, 19%

Other Asian Countries, 19%

Other Countries, 4%

Future

Sensitivity analysis (%)

The Chinese market is expected to expand to 100 billion RMB in 2011.

And Leoch is dedicated to strike for the top 5 role lead acid battery

manufacturer in the world with its experience from overseas and the cost

advantage of labour in China.

Lead price Lead price

FY11 FY12 up 10% down 10%

ASP 464 501 589 420

Revenue 3,642 5,934 6,990 4,966

SG&A -368 -630 -742 -527

EBITDA 661 1,099 1,286 928

EBIT 566 974 1,161 803

Net profit 445 776 929 635

Competitive analysis

Substitutes

Competitive threats

Lithium battery and nickel battery are substitute, but lead acid battery

performs better on the recycle side and the economic side.

Leoch leveraged on its experience from overseas and the comparative

cost advantage on labour in China to strike for top 5 lead acid

manufacturers in the world. We view Leoch as a fast growing company,

with a complete product range as compared with other local listed peers.

With recent environmental inspection, we believe the new entrant will be

limited and it is likely for leaders like Leoch to capture market share by

expanding capacity or M&A.

While Leoch customers are mainly industrial players, the ability to

transfer cost surge is not so high when compared with retail use battery

like those for E-bike. Yet, when Leoch expand its foothold onto other

segment like E-bike battery. The bargaining power will improve.

New entrants

Entry barrier is high after the nationwide environmental inspection. Every

new lead acid battery capacity need to be approved by provincial

environmental protection bureau. Besides, new players need to fulfill

environmental requirement by implementing facilities which cost

RMB5mn+, which set a barrier on capital. Customers

Leoch faces mainly enterprise clients, including world renowned players

like Emerson, BMW, Mattel, etc. Bargaining power is not too high

compared with local listed peers like Tianneng and Chaowei who face

mainly retail clients.

Suppliers

Lead is the main materials: ~80% of lead consumed in China are used in

lead acid battery. Lead is readily available in China. The company

purchase lead from middle man.

Fri, 02 Sep 2011


Page 13 of 25

Management

4

5

33

3

Vision

Growth strategy

Financial prudenceTransparency

Alignment with minority shareholders'

interest

5: Best; 1: Worst

Vision: the company strikes to become top 5 lead acid manufacturers in

the world and management comprises expert in different field. Vision is

good for Leoch

Growth strategy: the company set to increase its capacity at 58% in

FY10 - FY13 and plans to penetrate different battery application in China

for the growth

Financial prudence: the company net gearing is low after its IPO last

year. And the company is able to finance its CAPEX plan by cash on

hand til 2013.

Transparency: the company was listed in 2010, no track record can be

found.

Alignment with minority shareholder: the company was listed in 2010,

no track record can be found.

Risk

5

2

44

5

Industry

Business

ManagementExecution

Regulation

5: High risk; 1: Low risk

Industry risk: industry risk is high as PRC government is dedicated to

consolidate the industry and reduce pollution from the industry.

Business: Leoch is following international standard, thus we believe it

will be the survivor and likely a consolidator.

Management: The company is young and growing, major decision is

done by key management.

Execution: the company has a robust growth plan and execution of the

plan is not easy for a capacity CAGR at 56% in FY10 - FY13.

Regulation: PRC government may further tighten the entry barrier for

lead acid battery manufacturers.


Fri, 02 Sep 2011


Page 14 of 25

Exhibit 9: Peer Group Comparison

bloomberg Year Mkt Cap Price PER (x) P/B (x) Yield (%)

code End (HKD mn) (HKD) FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E

Hong Kong

TIANNENG POWER

819 HK 12/2010 5,013 4.60 11.9 6.5 5.3 2.1 1.7 1.4 2.6% 4.6% 5.7%

CHAOWEI POWER

951 HK 12/2010 4,453 4.43 7.2 8.6 6.3 2.9 2.2 1.8 2.0% 3.5% 4.8%

LEOCH INTERNATIO

842 HK 12/2010 4,693 3.52 20.1 8.8 5.0 1.9 1.6 1.3 0.0% 1.7% 3.0%

COSLIGHT TECH

1043 HK 12/2010 1,003 2.68 111.2 7.3 4.7 0.6 - - 0.0% 0.0% 0.0%

Average

3,791

37.6 7.8 5.3 1.9 1.8 1.5 2.3% 3.3% 4.5%

Median

4,573

16.0 7.9 5.2 2.0 1.7 1.3 1.0% 2.6% 3.9%

A share

FENGFAN CO-A

600482 CH 12/2010 8,258 17.91 141.9 67.9 45.0 6.3 - - 0.0% 0.0% 0.0%

SHANDONG SACR-A

002580 CH 12/2010 2,482 33.04 34.3 35.8 26.2 6.7 2.3 2.1 0.0% 0.4% 0.3%

CHONGQING WANL-A

600847 CH 12/2010 1,528 17.23 -93.8 - - 31.1 - - 0.0% 0.0% 0.0%

ZHEJIANG NARAD-A

300068 CH 12/2010 6,990 23.49 68.2 81.0 38.8 2.3 - - 0.4% 0.0% 0.0%

SHENZHEN KSTAR-A

002518 CH 12/2010 4,785 41.61 39.4 35.5 26.1 3.4 2.3 2.2 0.8% 0.0% 0.0%

Average

4,809

70.9 55.0 34.0 10.0 2.3 2.2 0.6% 0.4% 0.3%

Median

4,785

39.4 35.8 26.2 6.3 - - 0.0% 0.0% 0.0%

Source: Bloomberg, OP Research

Fri, 02 Sep 2011


Page 15 of 25

Appendix I: What is lead acid battery

Lead-acid batteries, invented in 1859 by French physicist Gaston Planté, are the

oldest type of rechargeable battery. Despite having a very low energy-to-weight

ratio and a low energy-to-volume ratio, their ability to supply high surge currents

means that the cells maintain a relatively large power-to-weight ratio. These

features, along with their low cost, make them attractive for use in motor vehicles

to provide the high current required by automobile starter motors.

Components of Lead-acid Battery.

The modern Lead acid battery is made up of:

A resilient plastic container which is usually polyethylene, but increasingly is

made from alternative co-polymers or reinforced, but the case material can

also be metallic or a synthetic rubber.

Positive and negative internal lead plates. The positive electrode (cathode)

typically consists of pure lead dioxide supported on a metallic grid, whereas

the negative electrode (anode) consists of a grid of metallic lead alloy

containing various elemental additives that includes one or more of the

following and sometimes others not mentioned, antimony, calcium, arsenic,

copper, tin, strontium, aluminum, selenium and more recently bismuth and

silver. These alloying elements are used to change grid strength, corrosion

resistance, reduce over-potential or maintenance, and internal resistance.

Porous synthetic plate separators are increasingly made from rib-reinforced

polyethylene, but are also available in PVC and fiber glass.

The plates are immersed in a liquid electrolyte consisting of 35% sulfuric acid

and 65% water. It is the electrolyte that facilitates the chemical reactions that

enable the storage and discharge of electrical energy and permit the passage

of electrons that provide the current flow.

The positive and negative lead terminals used to connect the battery to the

car and pass the current from the individual cells via a series of connecting

lugs and bridges.

Fri, 02 Sep 2011


Page 16 of 25

Exhibit 10: Structure of lead acid battery

Source: yahoo.com

Classification by usage:

Reserve power batteries are used to provide backup power for continuous

power supply in case of primary power source failure or outage and to store

electricity generated by an attached source. Reserve power batteries are

primarily used in telecommunications systems, UPS, electric utilities systems,

and other consumer and industrial applications, as well as in power storage

systems for the recently fast-growing renewable energy industry;

Motive power batteries, mainly provide power for motion and are used in

vehicles such as trucks, forklifts, mini vans, tourist coaches, and golf carts, as

well as electric and hybrid automobiles, electric bicycles and motorcycles;

SLI batteries, are used for the starting, lighting and ignition of vehicles such

as cars, motorcycles, tractors and boats or other internal combustion

engines.

Classification by technology:

Flooded or vented batteries, which require periodic watering and

maintenance; and

VRLA batteries, which are maintenance free. VRLA batteries can be further

categorized into:

AGM VRLA batteries, which are the most common VRLA batteries. TPPL

VRLA batteries and spiral pure lead batteries, which have higher energy

density, are two advanced product types in this category;

Gel VRLA batteries, which have longer life and higher tolerance for extreme

environmental conditions. Tubular gel VRLA battery is an advanced product

type in this category.

Fri, 02 Sep 2011


Page 17 of 25

Appendix II: China lead the market

China is the largest lead-acid battery producing country in the world,

accounting for 41.9% of total global production in 2009. China’s total production in

2009 was 156.1 million KVAh, of which 142.3 million KVAh (91.2%) was

consumed domestically and 13.8 million KVAh (8.8%) was exported abroad. With

~RMB500 ASP per KVAh, we expect the market size to be ~RMB100bn in China.

Exhibit 11: China lead acid battery market

15.6 25.9 37.2 45.9 52.2 61.6 73.588.3

24.933.7

40.344.6

49.758.4

68.8

81.3

13.6

19.6

26.230.9

40.4

46.6

54.9

65.5

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010E 2011E 2012E

Motive Power SLI Reserve Power

(KVAh mn)

Source: Asia Battery Association

18.5% CAGR in 2009 – 2013 in China. Market size is expected to be

235mnKVAh in 2013 in China, implying 18.5% CAGR VS. 3.5% CAGR for the

global market. According to Asia Battery Association, China will contribute 61% of

the world lead acid battery market in 2013 from currently 42%.

Usage of lead acid battery. In terms of 2009 sales volume, reserve power

batteries, SLI batteries, and motive power batteries accounted for 28%, 35% and

37%, respectively, of China’s demand for lead-acid batteries.

Exhibit 12: China lead acid battery market

36.7%

28.4%

34.9%

Motive power batteries Reserve power batteries SLI batteries

SLI batteries 49.7 million KVAh

Motive power batteries 52.2 million KVAh

Reserve power batteries40.4 million KVAh


Fri, 02 Sep 2011


Page 18 of 25

Appendix III: Lead acid battery is a preferred choice

Lead acid is cost effective. According to the Asian Development Bank,

lead-acid batteries are still the most cost-effective option. While advantages on

Li-ion is its mass. For indoors use, Ni-MH or Li-ion may be preferred. The shorter

life of Ni-MH batteries may not justify the higher cost to some users. Li-ion

batteries are expensive but only with 1.6x longer lifen compared to lead acid

batteries. With price going down, Li-ion could be cost-effective in the future.

Exhibit 13: Comparison between rechargeable batteries

Results Lead-acid Ni-MH Li-ion

Cost ($) 130 270 500

Mass (kg) 26 14 8

Lifetime (yr) 1.5 (3 ideal) 2.0 (4 ideal) 4.5 (9 ideal)

Volume (L) 10 4 5

Maximum Theoretical Power (kW) 6.2 - 2.9

Recharging Safety High High Low

Temperature Effects Moderate High Moderate

Assumptions VRLA Ni-MH Li-ion

Specific Energy (Wh/kg) 35 65 110

Energy Density (Wh/L) 86 235 170

Power Density (W/kg) 240 - 350

Cost ($/kWh) 130 300 560

Cycle Life (recharges) 300 400 800

Life-Cycle ($/kWh/recharge) 0.43 0.75 0.70


Near term replacement is not plausible for E bike. A good example to illustrate

this is on E-bike market: currently, lithium battery takes ~5% of market share in

E-bike battery. The battery is priced at 200 – 300% higher than lead acid’s; while

it outperform lead-acid by ~200% longer life span. But the drawback is that lithium

cannot be recycled. Without a technology breakthrough, it stands a slim chance

for lithium battery price cut. A typical E bike cost ~RMB2,000, by replacing lead

acid battery by lithium’s, the cost surge will be ~RBM1,000.-

Fri, 02 Sep 2011


Page 19 of 25

Appendix IV: Reserve power benefit from various sectors

17.5% CAGR in reserve power. Market demand for reserve power batteries in

China grew at a CAGR of 31.3% from 2005 to 2009, driven by the rapid

development of telecommunications facilities, upgrading of electrical grids,

computer usage penetration and railway construction. In 2009, 39.8% of the

reserve power lead-acid batteries in China are used in telecommunications

systems, 33.4% in UPS, 12.2% in electric utilities, 9.3% in railways, and 5.3% in

other uses. It is estimated that reserve power battery market will grow at 17.5%

CAGR from 2009 to 2012, with the market size reaching 65.5 million KVAh by

2012.

Exhibit 14: China reserve power lead acid battery demand

13.6

19.6

26.2

30.9

40.4

46.6

54.9

65.5

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010E 2011E 2012E

(KVAh million)


Growth drivers for reserve power:

Telecommunications. Telecommunications markets is growing in China.

Upgrade in 3G in telecommunication in recent years also helps. The total

Chinese investment in 3G in 2009 was ~RMB150.0 billion, and is expected to

grow to ~ RMB400.0 billion from 2010 to 2012

UPS. UPS provide emergency power when the primary input power source

fails. UPS are widely used on high-precision instruments, medical equipment,

security monitoring, network systems, and automated production lines, and

are used in industries such as finance, healthcare, utility, government,

technology and transportation.

Electric utilities. The electric utility industry is a key industry in China, and it

is in a new phase of increased structural adjustment with accelerated

upgrading and construction of urban power grids.

Railways. Railway construction is a key focus of China’s infrastructure. In

accordance with China’s Mid-to-long-term Railways Network Plans, China’s

national rail network will increase to 120,000 km by 2020.Lead-acid batteries

are used mainly in railway signal systems and train illumination systems.

Fri, 02 Sep 2011


Page 20 of 25

Renewable energy. Lead-acid battery manufacturers have a new market

opportunity to meet the demand in renewable energy, such as in wind and

solar power. Energy storage batteries are one of the key equipment items of

energy storage systems. From 2005 to 2009, China’s installed wind power

capacity has increased at a CAGR of >100.0% and installed solar power

capacity has increased at a CAGR >40.0%.

Fri, 02 Sep 2011


Page 21 of 25

Appendix V: Ride on the fast vehicles for SLI

17.8% CAGR in SLI. Market demand for SLI batteries in China grew at a CAGR

of 18.9% from 24.9 million KVAh in 2005 to 49.7 million KVAh in 2009, primarily

driven by the rapid development of the automobile and motorcycle industries. In

2009, over 80.0% of SLI lead-acid batteries are used in automobiles and

approximately 15.0% are used in motorcycles. It is estimated that China’s SLI

battery market will keep growing at a CAGR of 17.8% from 2009 to 2012, with the

market size reaching 81.3 million KVAh by 2012. The chart below sets forth

China’s market demand in terms of KVAh for SLI batteries for theperiods

indicated.

Exhibit 15: China SLI battery market size

24.9

33.7

40.344.6

49.7

58.4

68.8

81.3

0

20

40

60

80

100

2005 2006 2007 2008 2009 2010E 2011E 2012E

(KVAh million)


Growth drivers for SLI:

Automobiles. In the past ten years, China’s automobile industry saw rapid

development and rising penetration rate of automobiles. China is currently

the largest producer of automobiles and is the largest automobile market in

the world, according to China Association of Automobile Manufacturers. The

rapid growth of China’s automobile market provides a huge market and

strong growth potential for automotive SLI lead-acid batteries.

Motorcycles. China is also the world’s largest motorcycle producer and

market, according to China Association of Automobile Manufacturers.

Fri, 02 Sep 2011


Page 22 of 25

Appendix VI: E-bike helps motive power battery

19.2% CAGR in motive battery. Market demand for motive power batteries in

China grew at a CAGR of 35.2% from 15.6 millionKVAh in 2005 to 52.2 million

KVAh in 2009, primarily driven by the rapid development of light electric vehicles

such as electric bicycles and motorcycles. In 2009, over 90% of the motive power

lead-acid batteries in China were used in light electric vehicles. Further, the

Chinese government’s support of the development of electric and hybrid vehicles

is also expected to foster more demand for motive power batteries. It is estimated

that China’s motive power battery market will keep growing at a CAGR of 19.2%

from 2009 to 2012, with the market size reaching 88.3 million KVAh by 2012. The

chart below sets forth China’s market demand in terms of KVAh for motive power

batteries for the periods indicated.

Exhibit 16: Motive battery market size in China

15.6

25.9

37.2

45.9

52.2

61.6

73.5

88.3

0

20

40

60

80

100

2005 2006 2007 2008 2009 2010E 2011E 2012E

(KVAh million)


Growth drivers for motive battery:

Light electric vehicles. Sales of light electric vehicles including electric

bicycles, electric motorcycles, electric scooters, electric wheelchairs and

others are growing significantly. Among the light electric vehicles, electric

bicycles in China have been the key market and sales of electric bicycles

have increased rapidly in the past few years.

Electric and hybrid automobiles. In recent years, the Chinese government

has incorporated the development of renewable energy vehicles into national

planning. Government authorities have also classified development of electric

vehicles and related motive power batteries as key industries. In 2009, the

PRC State Council announced the “Auto Industry Restructuring and

Revitalization Plan”, and stated the government’s plan to promote the

application of electric vehicles in the public transportation sector. Electric

vehicles and motive power lead-acid batteries required to power them are

expected to become a significant growth opportunity and establish significant

market scale.

Fri, 02 Sep 2011


Page 23 of 25

Exhibit 17: Management team

ZHAO Huan

VP, ED

6 years

International Sales

Philip Noznesky

Sales President of LBC

ED

40 years

US Sales experience

Curtis LIU Shuen Kong

CFO

14 years accounting

and finance experience

QIAN Guanghong

VP of Production

Operations

12 years experience

HONG Yu

VP of Procurement

17 years experience

XIONG Zhenglin

VP of R&D

17 years

LIU Yangsheng

INED

40 years experience

in telecom system

AN Wenbin

INED

30+ years experience

in int’l diplomacy

CAO Yixiong

INED

17 years accounting

and finance experience

PENG Xiaomeng

VP and

Chief Engineer of R&D

5 years experience

LI Yujiu

VP of Domestic Sales

20 years experience

Malcolm Howes

Europe Operation MD

26 years experience

in the battery industry

DONG Li

CEO, Chairman, Founder

12 Years industry experience

Outstanding China Non-governmental Entrepreneur

Committee Member of the Youth Committee of All-China Federation of Retuned Overseas Chinese

Source: Company

Fri, 02 Sep 2011


Page 24 of 25

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