Battery Powered Returns (GP Batteries $1.70) This is going to make my year!

2nd post of the weekend. Before I start, I would like to say something about the cost of living in Singapore. On Friday, I went to Burger King for breakfast with my colleagues. The interesting thing was I ordered a croissant meal and to my surprise, there were no hashbrowns. To think that I still paid 5 bucks for the meal, I only got a hot tea and croissant! Thats just crazy! I remember just a couple of months ago, I bought a meal there and I paid only 6 bucks for a meal and it came with the hashbrowns! So basically, Burger King realised that they will be on the losing end if they included hashbrowns with the meal, rather they preferred consumers like me to pay an additional $1.50 for them than to incorporate them in the meal. What does this mean? Its called indirect inflation! My god, prices are rising so fast but our government tells us that inflation is tepid. What is the current fixed deposit rates now? Less than 1%? Do your maths.

I promised to talk about the stock I have been buying on the quiet. I did not write about it because (you've guessed it) its too illiquid. I had a tough time buying into the stock and trust me, it is as illiquid as any of the other stocks I have bought. The only difference is, it has started to move sooner than I thought. The stock gained 5% on last friday alone. I have to admit I bought it a lot earlier but I just did not have to time and also I could not make up my mind on whether I have bought enough of it.

Ok now lets talk more about the stock. I understand that the past 2 weeks, Sarin has been the talk of the town, up from my call at $0.51 to $0.695. What can I say? Value is delivered. Here I have something even more enticing, GP Batteries. Huh what did I hear you say? Batteries! Hahaha. To be honest, I have been into this company for the better part of the past 6 years. I believe some of my more experienced readers would know that this is one stock that was once the toast of the town. How the great has fallen from grace.

I always found the company intriguing because of its leadership position in the China market and their green colored packaging (ok I find it repulsive). Why is there value in this company? Is battery a dead business? If we look from a layman's point of view, rechargeable, AAA, AA batteries are out, I do not disagree. But this is a company that is much more than just this. This is a company that does much more than this. GP Batt is currently moving aggressively into the Electric Vehicle battery space and this is potentially a huge market, especially in China. With their already strong leadership position in China, it puts them in a good position in terms of distribution network and brand recognition. Why am I into this EV battery segment? Does the name BYD ring a bell? Yes, thats right. It is the largest battery operated car maker in China. Warren Buffett bought into the company more than a year ago and the stock has returned more than 800% since then. What does BYD stand for? Build Your Dream.

I am not saying that GP is going to be like BYD, but it is going to be a prominent player in the future, given its natural advantage. Also, the company took the opportunity to buy into an electric scooter business in the US called Vectrix at distressed prices (which went into receivership). To me, I believe this is a good acquisition at a good price. Electric scooters will be a good market to be in and also a less crowded one compared to hybrid and electric cars.

Lets now look at the company's financials. Basically, it has turned around and delivered strong returns over the past 9 months. It has been making losses in 2007-8 due to high nickel prices but it has made a dramatic turnaround. Currently, the company has a total of 110 million shares, giving it a market capitalization of S$187 million. The revenue registered for the first 9 months for 2009-10 was S$600 million and S$33 million in net profits. Lets assume they make another S$4 million in the final quarter, we would be trading at 5 times price to earnings. How cheap is that? If EV batteries really takes off, 10 to 20 times would not be too much to ask. So what would that mean? Double or triple from here? Throwing in the cherry of the company trading at 0.6 times its book value, that sounds really enticing.

Interesting development here, would be the increased interest in the stock and also the stock of its holding company, GP Industries. GP industries own 49% of GP Batt and its stock has outperformed that of GP Batt this year. Who is buying into GP Industries? Gold Peak, the ultimate holding company of GP industries. Gold Peak has been buying back the stock of GP industries throughout March. Currently, Gold Peak has a total direct interest of more than 79% of GP industries, which means a mandatory takeover offer may soon come in. I believe Gold Peak is looking to consolidate its holdings and buying back stock at a cheap. The real target is not GP industries, but GP Batt. It is a cheaper way to gain stronger control of GP Batt.

Ok you want more information on this, you will have to read on your own cos I am quite tired already. So this is where I will stop. Basically, I love this one, more than any others which I have now.

Best,

SVI