Catching up with Chaowei Power

Business momentum was strong in 3Q but there were increasing cost pressures with the recent hike in lead prices.

Kim Eng Hong Kong Research reported, following a meeting with the CFO:

Monthly sales in 3Q reached all-time high, the company sold 7-8m battery units each month in 3Q (vs. ~6m battery units each month in 1H12). Management is confident to achieve FY12 volume guidance of 78m units.

There was no change in ASP in 3Q. Looking ahead into 4Q which is a traditionally off-peak season, management is considering an ASP adjustment as the lead cost has been increasing recently.

Chaowei believes that it is easy to source lead material from lead suppliers (top 5 suppliers accounted for 35% of its lead costs) and therefore, the company has no plans to step into lead recycling business meanwhile. Also, Chaowei reiterates its business focus is on battery production but not lead recycling business.

The company expects to reach a market share of 25-30% at the end of 2012, and will further enlarge into 30-35% at the end of 2013, through organic expansion and M&A opportunities.

Chaowei plans to allocate 20% of CB proceeds to repay short-term debt and 80% of proceeds to capacity expansion. Given that the proceeds should enable the company to meet the capacity expansion plan in the upcoming years, we believe that further fund raising activity is unlikely in the short term.