OTI

[KD]

Hi - I'm new to the forum I was fortunate enough to pick up a small parcel of ATR shares at 70c late last year. Found this forum later when on the lookout for other ATR holders - enjoyed the coverage and excitement here re ATR and posted on this recently under ATR thread. Naturally ATR holders are on the lookout for information on other Chinese companies like ATR. At the same time as I purchased ATR I also purchased some OTI (Oriental Technology Investment) at a little over 9c. Both ATR and OTI intended as long term holdings. OTI price shot off the blocks early but has come back since to around 11-14c. ATR price just continues to multiply. OTI are a small company (cap 15m) with a small PE (estimate currently 6x) and good growth prospects. New manufacturing facility should drive growth in next few years - demand for batteries in China should drive growth over the longer term. Having said all that, I know precious little about the company's history. Once traded as Apollo (manufactures Apollo batteries). Seems to have worked its way into a nice position in terms of balance sheet and industry dominance. Discovered the Loftus Capital Partners (LCP) are holders. Wilson recommends and holds LCP who invest alongside small companies particularly with Asian connections. So I'm trusting that LCP have done their homework. There might be some interest on this forum to add to the story and have a closer inspection of the company. Appreciate any feedback.

Companies Chinese subsidiary is Yangzhou Hua Yang Battery Co. Quote from Chinese web-site (http://www.huayang-battery.com):

“Yangzhou Hua Yang Battery Co.,Ltd. is one of the largest factories to produce automotive batteries in China, and have been producing 25 years. We have first class production and testing machines. 1 million batteries can be produced every year ... Yangzhou Hua Yang Battery Co. is the largest factory in China to export batteries to the Europe, Australia, South America and some Middle-east countries and regions.”

Interim report to June 2003 indicates continuing strong demand from Europe and steady demand from Australia. Company building a new factory to meet demand – has been delayed 5 months by local government rezoning policy but company compensated for work done by 25% reduction in land cost for new site. Present facilities operating at full capacity but growth in sales expected to level out until capacity starts to become available from new factory, possibly in 3rd quarter, 2004.

20% increase in cost of lead flagged as likely to affect margins. Revaluing of the RMB exchange rate also flagged – company intends re-entering Chinese domestic market which will provide a hedge against possible rise in exchange rate.

Historical financials are interesting but having trouble formating for posting at the moment.

[KD]

I note that Dimebag has replied to my posting under ATR thread with some good points
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Dimebag wrote

"Thanks for the lead with OTI. I have done a few hours research on the company over the weekend and can at first glance the company looks to have a fair bit of promise.

The company seems to have a reasonably consistent sales track record, and profitability is beginning to shine through.

Their sales effort into Europe have been assisted by a few external factors lately however - most predominantly the weak US dollar (and thus Chinese currency) which has enhanced the company's global competitiveness. This circumstance will surely not persist long-term, and thus external sales growth could be impacted should the US dollar turn.

Raw materials prices (lead) are also up 20% recently, and this will impact margins. OTI are exposed to these factors.

Still, the company does look promising. I'll be awaiting the 2003 full year results with interest. Hopefully the progress regarding capacity extentions will be promising. If the company can crack the local market, there may well be considerable upside. This will provide a natural defense against possible external sales weakness should China's currency increase dramatically.

Are you aware of any competitive edge the company's product has over its competitors. Is it any better, and sustainably so? I'm not too familiar with the battery market."
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Dimebag -

OTI seem to have a cost advantage by operating in China. I found an article where NZ was up in arms regarding flooding of local battery market with cheap Chinese imports. I will have to do some more digging to find article again. As I note above - my knowledge is limited too -

cheers

[KD]

A few hours and red wines later -

of the stocks I hold OTI is the one I know least about and not through lack of trying. I can't agree more with Dimebag's response -1) there are external factors favouring recent performance; 2) these may not persist; and 3) for information one really has to rely on each and every co. report.

The last price movement was positive following last full year report. However the price response lagged co. report somewhat - unlike better known stocks where price movement pre-empts co. report. So I think this is the type of stock which really lends itself to forum such as this where a rapid collective appraisal of co. report is possible. OTI is not a 'rush out and by' but rather one to keep an eye on. This co. just hasn't the revenue/earnings history of the likes of ATR but recent performance and potential future market attract. A few other positives - 1) lead-acid batteries always need replacing; 2) there is no great need to change the mould every year or so (reducing need for capex); 3) Apollo is a strong brand; and 4) China is perhaps the right place to manufacture. I suspect poor performance early on may have preceded move to Chinese base - but only guessing. A question remains as to whether recent strong performance is simply a reflection of favourable external circumstances or is more sustainable. Over to the forum ...

cheers

[KD]

world-wide list of lead-acid battery manufacturers: www.uuhome.de/william.darden/batbrand.htm

brief history of Apollo batteries:
http://www.apollobatteries.com.au/apollo.htm

still researching .....and thinking about consequences of rising lead prices ...

KD do some research on apollo batteries in NZ is it the same company. sorry can not tell you any more as it is a long time ago.

[KD]

were apollo batteries ltd (ABT)
now oriental technologies investment ltd (OTI)

changed on 08/03/00

any information on demise of ABT?

[Dimebag]

KD

Sorry about the slow response. I am very busy at the moment so please forgive me if I take a few days to respond. I do read all your posts, but often will have to find time at a later date to type a response.

Thanks for the information. Very useful.

OTI did report a $1.3m profit for the half year to 30-06-2003. However, I did note that in the in chairman's AGM address to shareholders, he noted that pre-tax earnings were $1.1m for the first quarter. Given that OTI pay nominal tax, it could appear that second quarter earnings were more in the vicinity of $300k.

Fully year profit may come in closer to $2m, due to deteriorating external factors, and first half 2004 earnings may be down on the pcp. Still, OTI appear to be on a somewhat lowish PE of around 7-8x if second half earning can hold up.

Still, these short-term factors are realitively inconsequential. What is really important is whether OTI can thrive long-term. Indications to date would appear positive.

There are a few questions that need asking though. The company failed when it was based in Australia. Is it succeeding only because China's artifically low exchange rate is giving them a temporary competitive advantage selling into Europe?? Presumably, China's low-cost manufacturing environment are also contributing. These factors will not all persist long-term.

Still, if OTI can use this advantage to build up scale economies, this could give them the push they need to survive and prosper long-term.

Still relatively higher-risk (when compared to the likes of ATR) due to their limited track-record, and much lower competitive strength.

One I will definitely keep an eye on.

Best Regards
Dimebag

[KD]

Thanks for this feedback - it's tremendous. Risk relative to ATR was clear at the outset just by a glance at historical figures but you have helped to crystalise the issues. Like you guys I'm busy too - so will come back on this a bit later.

In the meantime recent lead prices are in fact graphed on company website.

http://www.apollobatteries.com.au/newsflash.pdf


cheers

[KD]

Final report 2003 out today. IMO very good result for 2003 - However report confirms OTI sailing into strong headwinds in shorter term with record (and rising) lead price the major risk at present. Losses now being made as a result and in discussion with customers for price rises. Longer term I'm liking this companies prospects. Continued growth by aquisition in China would seem on the cards. Personally more comfortable buying for longer term when the price of lead is at record highs than lows. PE low but not the bargain ATR was at similar PE. Share price firming. A good one to keep on the radar screen this year.

some key points in report -

2003 Net profit 2.65m (+84%)
diluted eps 2.24c (+81%)
pe @ 14c = 6.25
production facility still scheduled for completion 4th quarter 2004
2000 factories in China and OTI looking "to take full advantage of the opportunities arising from the inevitable consolidation process from this large number of small factories"

otherwise story remains much the same -

cannot meet demand - will get boost when new facility opens
confirmed combined capacity will more than double current capacity

concerns

lead prices doubling since beginning of last year and continuing to rise - co now making losses and may continue to do so but negotiating with customers for price increases. (I guess they're not alone in this regard).


Reduced tax rebates and new import duties on Chinese batteries - Confirm they are looking to re-enter Chinese market to mitigate such effects.

also

paid 0.53 million against profit share payment bringing total paid to 1.041 million (out of 20.8 million payable)

paid 1.9 million for 80% Yangzhou Apollo battery co. on June 28

[Dimebag]

Cantab/KD

Thanks for the astute comments all round.

I'm with you guys on this one.

In demonstration of my outstanding market timing prowess, I managed to pick up 10,000 shares at 17c today (what appears very likely to be the day's high. I've done that a disconcerting number of times!).

If I had of known it was you Cantab pushing up the price this morning, I may well have bid less aggresively!!

But seriously, OTI really does have great potential. There will certainly be short-term profitability issues, but this is of little consequence. If lead prices do persist at high levels, as KD points out, OTI will not be the only battery company affected. We would expect to eventually see an across the board price increase to compensate.

Survivors of adverse conditions are often left better off after adverse events anyway, as less-fit competitors go belly-up. It could create a number of attractive acquisition opportunites for OTI.

I'm surprised they haven't acquired a few companies already. This would surely be the fasted way to boost capacity. If I were running the place this would be high up on my priority list right now. OTI have $7m in cash.

Earnings should near double in 2005 to say $5m ish. If this happens the stock should easily double to tripple.

A great many thanks to KD for uncovering this stock and bringing it to our attention.

Regards
Dimebag