On July 20, Mao Huanyu, the COO and chief engineer of the Shenzhen-based Bak Battery Company, Ltd. (NASDAQ: CBAK), declared with full confidence that Shenzhen Bak will be the first domestic rechargeable battery producer to compete in the high-end battery market-specifically, the notebook computer-used Li-ion battery market.
Statistics provided by Mao show that China’s enterprises, successfully operating in the Li-ion battery field since 1997, command more than 20% of the global market. However, the number of Li-ion batteries produced by domestic enterprises for internationally renowned notebook computer manufacturers like Dell, Hewlett-Packard and Lenovo is still zero. This huge market, with its strict performance requirements, is still under the firm control of Japanese and South Korean enterprises such as Sanyo, Sony, Panasonic and Samsung. Mao believes that even strong domestic battery makers like the Shenzhen-based BYD Battery and Tianjin Lishen Battery, are unable to take full advantage of market opportunities because of the high threshold of the industry. But now, Shenzhen Bak hopes to break the ice.
Mao’s confidence comes from Bak’s first fully automatic notebook PC Li-ion battery production line in China that had just been put into mass production. Bak imported the whole set of automatic Li-ion battery production equipment from Japan whose monthly productivity of the first phase stands at about two million batteries. It was also disclosed that one imported coating machine, a component of the production line, costs US$1.5 million. Though the company declined to disclose their total investment, obviously the figure far exceeds that of an ordinary mobile phone Li-ion battery production line.
US$1.5 million roughly equals the total annual profit of a typical medium-sized Li-ion battery enterprise in China. The fact that Bak has made an investment in a capital-intensive industry-the notebook computer Li-ion battery production means a large amount of investment in equipment purchase. Where did Bak, one of the three largest battery enterprises in China, generate such a huge amount of capital?
Continuous Financing
Bak is among the lucky few Chinese enterprises which have successfully been listed in the NASDAQ OTCBB (Over the Counter Bulletin Board).
It got onto the OTCBB in January 2005 through Alternative Public Offer (APO) with an American coffee manufacturer. Then it raised US$17 million through private financing on the US capital market (a price-to-earnings ratio of 11:7), which overturned the traditional APO practice that listing comes before financing. In September of the same year, Bak raised another US$43 million in the US. And eight months later, it became the first Chinese Li-ion battery enterprise to be listed on the NASDAQ after it finally met the stiff OTCBB requirements, such as price per share above US$5 for more than three months, a maintained share price of no less than US$1 thereafter, and a minimum of 400 shareholders, etc. On the first day being listed, their share price peaked at US$10.75 and closed at US$9.99 with market value of US$550 million.
In addition to the innovative plan of the OTCBB listing, Bak’s success has also been attributed to the rapid development of its operation. Its annual integral growth rate has exceeded 200% in recent years. In the first fiscal quarter of 2006, net profits were 110% higher than the same period of the previous year, and the gross profit margin increased from 17% to 27%. In the second fiscal quarter of 2006, the company’s net profits jumped by 172% to more than US$12.2 million with sales income rising by 48% to US$38.2 million.
Yahoo Financial Statistics indicate that, although Bak with the market value of US$260 million (based on its market price on July 27, 2006) only ranks 23rd among the 54 industrial electronics enterprises listed on the NASDAQ, its growth rate for five consecutive years ranks second, and the profit growth rate per share, seventh.
Bak was incorporated in 2001 by Li Xiangqian, whereas its neighbor Shenzhen BYD got into the Ni-MH & Li-ion battery market in 1997 and has earned the reputation of “King of Battery” in the industry. In terms of global sales, BYD’s Li-ion batteries, Ni-Cd batteries and Ni-MH batteries rank second, first and third respectively. In 2001, BYD realized RMB560 million (US$71 million) worth of Li-ion battery sales. In July 2002, it was listed in Hong Kong at a price of HK$10.95 (US$1.4) per share and has managed to raise HK$1.6 billion (US$ 205 million) since listing.
According to Liu Houde, vice president of the marketing department of Bak, had BYD not implemented a diversification strategy or entered the fields of mobile phone spare parts, liquid crystal display and automobile, BAK would not have any opportunities to exist and develop so fast.
Since 2003, Wang Chuangfu decides to push the company into both the IT and automobile fields. Drawing on its enormous customer base, BYD has broadened its products range and now supplies almost all varieties of mobile phone components, including displays, plastic shells, keyboards, and flexible circuit boards. Sales income soared from RMB160 million (US$20 million) since it was listed to RMB1.9 billion (US$241 million) in 2005. The proportion of sales income from cell components has increased from 15% to 29%, surpassing nickel battery sales to be the second pillar. In the first half of this year, BYD sold 32,500 Model F3 automobiles, accounting for 10% of their overall sales.
But last year BYD saw its hardest time since its entering the Li-ion battery market. Many of its major clients-domestic mobile phone manufacturers, surpassed by multinational competitors, lost most of their market share. In addition, the market was deluged with fake mobile phones, and orders from its major clients were greatly reduced, thus severely affecting BYD’s core business. In 2005, sales of Li-ion batteries dropped 40% over the previous year. But with its phone components business, BYD managed to maintain its continuous growth.
Bak, however, has followed a development path quite different from BYD since its listing, dedicating itself to R & D, production and distribution of Li-ion batteries only.
It took the opportunity of BYD’s shifting to other industries to expand crazily. By the end of 2003, total shares issued by Bak amounted to RMB100 million (US$12 million), and at the same time, it began to utilize loans to expand its productivity. In 2004, Mao Huanyu, respected as a Chinese Li-ion battery industry pioneer, was made vice president of BAK in charge of the construction of the automatic column-type Li-ion battery production line. By the end of 2005, monthly productivity of Bak had reached 45 million Li-ion battery cells with a workforce of more than 10,000. Today, Bak is one of the largest Li-ion battery manufacturers in China, ranking third on the global market.
Prior to their OTCBB listing, Bak maintained a growth rate of 100% for three consecutive years. However, with this skyrocketing development, their assets liabilities ratio also rose sharply, which was reported to hit 80% in the second half of 2004, thus resulting in great need of capital.
In September 2005, Bak began to produce lighter, more flexible polymer Li-ion batteries and conduct R&D of more advanced Li-ion fuel batteries. This June, the company decided to invest in the production of Li-ion batteries for laptop with monthly productivity targeting to eight million units, which would rank Bak the largest Chinese producer of Li-ion batteries for laptop.
Liu disclosed that, because of the enormous capital required for the notebook Li-ion battery project, there may be the third time of financing.
