Strong government backing and relevant product portfolio make this green energy giant a stock to own
A rose by any other name would smell just as sweet. Although it is not named Tesla, Hong Kong-listed Tianneng Power International (TP), mundane though it may sound, is just as exciting. TP is a leader in the Chinese new energy battery industry. The company has been around for more than 30 years and has grown into a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles (EVs).
The main products and services TP provides include power storage ancillary services; production and sale of lithium batteries for new energy vehicles; start-and-stop batteries; wind power and solar power storage batteries; the recycling and cyclic utilisation of waste batteries; and construction of smart-micro grids in cities across the nation, along with the building of green and smart industrial parks. Simply put, TP is an important player in the value chain of China’s goal in turning environmentally friendly in the future. The company has two reporting segments: First is the sales of batteries and battery-related products, the other is the trading of new energy materials.
Our case for TP is that the company is in the right industry, manufacturing the right products, for the right geographical segment. It is a high-growth company with solid historical fundamentals and profitability. We think the company’s business model is profitable over the near and medium term based on the following reasons: Firstly, the company has strong government backing for its business, given the Chinese government’s one-track goal of becoming environmentally-friendly. TP has stated that its business is aided by the government at all levels, for example, through the provisioning of funding through grants. Even during the first half of 2020 when the pandemic was peaking, the company was still able to produce decent results and the impact to the financial performance of the company was limited as it was aided by the government.
TP is also the top new energy brand in the battery industry in China, given the awards and accolades it has received throughout the years. This results in the company having a better reputation, particularly among its clients and the government, which should allow it to deepen its moat through contracts and demand for its products and services.
TP’s main business involves high-end eco-friendly batteries, which has had a good track record of providing the company with strong cash flow. TP also has a superior technology for lead batteries supplemented by lithium batteries. Lead batteries have a strong competitive edge compared to alternatives such as nickel-cadmium batteries as they have higher safety, recyclability, price to performance ratio and excellent performance in high and low temperature environments.
As it stands, lead batteries have a leading position in the global rechargeable batteries market and are the most commonly used batteries in vehicles and equipment such as light EVs, special EVs, and start-stop systems in automobiles. The growth prospects of these batteries are expected to be strong, as catalysts such as the in-depth application of the 5G mobile network in lead batteries could give them additional features such as identifiability and traceability, remote controllability and connectivity to the Internet of Things (IoT).
China’s recovery from the pandemic has also brought many favourable trends to TP. Given the higher utilisation of e-commerce platforms due to social movement orders, there has been a significant increase in short-distance distribution services which promotes the development of the light EV industry. Food delivery and courier services in particular have boomed, which has resulted in significant growth of the two-wheeled electric bicycle industry, which is a great opportunity for TP to capitalise on.
China’s environmental and anti-pollution policies and laws, as well as adherence to President Xi Jinping’s idea of going green, are also expected to benefit TP. Some of these laws pertaining to TP include the development of ecological designs for electrical appliances, lead storage battery and vehicle motive battery, along with reusing and recycling measures. TP plans to continue leveraging its advantages in technology and market channels to further strengthen its leading position in the new energy and eco-friendly battery market in China, and we think TP checks all the right boxes to achieve this over both the short and medium term.
The company will be reporting its financial results for the FY2020 ended Dec 31, 2020, soon, but has released a statement saying it expects an increase in profits for the fiscal year under review. The increase in profits is mainly attributable to the overall lower price of lead which is the company’s principal raw material. In addition, growing demand for lead batteries also significantly contributed to the expected increase in profits.
Investors ought to note an important change to the company’s recently completed exercise of listing its battery manufacturing business unit, which was approved in mid-December 2020. This new company will be listed on the Sci-Tech Board of the Shanghai Stock Exchange and would mainly manufacture motive batteries for light EVs such as e-bikes and e-tricycle; special-purpose batteries such as start-stop batteries and energy storage batteries; and lithium batteries. TP owns 86.53% of this spin-off company, known as Tianneng Battery Group. In terms of yields, TP is relatively attractive to benchmark risk-free rate of 3.2%, with earnings, operating cash flow, and free cash flow yields of 13.9%, 30.5% and 11.5% respectively. As for its financial health, TP is in a comfortable position, with a current ratio of 1.2 times, a debt-to-equity ratio of 29%, and an interest coverage ratio of 9.4 times. Chart 1 illustrates the strong historical cash flow generation of the company, indicating strong profitability of the company.
Analysts have given a target price of HK$27.56 ($4.74), which is well above its current trading price of HK$14.94. Our inhouse valuation of the company indicates that TP’s fair value is at least 30% above its current trading price. Investors, particularly those seeking high growth, should invest in a company that is at the forefront of a state-backed industry.
