Performance: +6.2%
Hong Kong-listed Tianneng Power International was the other gainer in our portfolio for the four-month period, with a 6.2% gain. A leader in the Chinese new energy battery industry, the company is a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles.
The thesis for the company is that it is trading very cheaply. Also, Tianneng Power is in the right industry, manufacturing the right products, for the right geographical segment. It is a high-growth company with solid historical fundamentals. The company has strong government backing for its business, given the Chinese government’s goal of becoming environmentally-friendly.
The performance of Tianneng Power’s most recent financial period was poor, as net profit declined significantly because the raw and auxiliary material prices of its major products recorded a large increase. Although this variable cost was unfavourable, Tianneng Power’s operating costs were under control. It saw a decline in selling and distribution, administrative and R&D expenses relative to the previous comparable period.
The company’s investments are currently focused around its newer business, through its lithium-ion, start-stop and smart energy storage, and recycling business. The business continues to grow through more sales and revenue, but the problem is with its raw material costs which dent the company’s overall profitability.
To address the volatility of the raw material prices, Tianneng Power is developing a user ecosystem operation and Internet of Things platform, essentially forming a “cloud-based Tianneng”. This platform greatly improves production efficiency, saves consumption of energy and raw materials, reduces wastage and defective rates, and enables flexible production. More importantly, it must be noted that the company is still operating cash flow and free cash flow positive.
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At current prices, the company’s yields are attractive compared to the risk-free rate of 2.8%. Its earnings yield and operating cash flow yield are 28.6% and 12.6% respectively. Its dividend yields are also attractive at 4.8%, given its significant price drop over the past few periods. Of note, the company continues to produce cash, which makes the dividend payments more sustainable. Compared to regional peers, Tianneng Power trades at a 71%, 82% and 48% discount respectively for its forward P/E, EV/Ebitda, and P/B, denoting that it is very attractive and cheap compared to peers. The company’s balance sheet is sound, with a current ratio of 1.3 times, a net cash position and an interest coverage ratio of 15 times.
Sentiments-wise, there are three “buy” calls, one “hold” call and no “sell” calls from analysts. The average target price for the company is around 40% above its current trading price of HK$8.24 ($1.44). Based on our revised in-house valuations, we think its fair valuation is at least 20% above its current trading price.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
