CSGH is positioned to benefit from the re-emerging consumer

China Sun Group High-Tech Co. (CSGH.OB: OTC) is the People’s Republic of China’s (PRC) second largest private producer of the cobaltosic oxides necessary to manufacture anodes (electrode for electrical current flow) for high capacity, rechargeable lithium ion batteries. The versatility of these, light-weight, high capacity energy sources have made lithium batteries ubiquitous. Not only are they extensively used in hand held or compact devices like cellular phones, laptop computers, and digital cameras, but are used in green technologies like electric automobiles and scooters, and wind and solar energy storage. Governments and militaries use lithium technology for submarines, robots, unmanned aircraft, and space satellites.

The China Battery Industry Association research suggests that the growing demand for portable and green technology in China alone will fuel a 30% annual increase in demand for lithium ion batteries. The PRC’s five year development program lists lithium ion battery development as its third objective. Battery manufacturers in China will easily exceed their present 1,000 tons/month demand for cobalt oxides. China Sun’s 12 production lines presently have capacity for 600 tons/month, a recipe for future growth.

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Before the world financial crisis and recession, the demand for cobalt products by Chinese battery manufacturers exceeded supply, so pricing power favored cobalt producers like China Sun. World wide decrease in consumer demand has eroded much of that pricing ability in recent quarters. However, China’s recent 8% GDP growth rate and policies to increase domestic consumption bode well for consumer products containing lithium ion batteries and will restore pricing power for cobalt producers. In anticipation of returning demand, China Sun has entered into a purchase agreement for 15 years of cobalt mining rights in the Democratic Republic of the Congo. A cheaper source of cobalt will increase China Sun’s profit margins and reduces its dependence on its primary domestic supplier which presently accounts for 47% of raw material purchases.

China does not have adequate domestic cobalt ore to satisfy demand and imports most of its cobalt needs. Raw cobalt ore cannot be legally exported from the cobalt rich Congo. An on-site processing plant at its Congo mining facility allows China Sun to ship the legally exportable processed cobalt to its production facility in Dailin, Liaoning Province, or to other international markets for cobalt. With a present Return on Invested Capital (ROIC) of 37%, China Sun already enjoys a wide moat over its four major competitors. This agreement with the Congo coupled with its newly patented extraction and cobalt oxide production processes will further separate China Sun from its peers.

China Sun is extremely well managed. It has financed increases in R&D of 16% and CapEx of 200% from operating income, carries no debt on its balance sheet, holds over $9,000,000 in cash and sports a 25% ROE. Selling at 9.5 times earnings, 60% of book value, and only 2 times revenues, China Sun is a bargain. Since its IPO in 2006, China Sun’s earnings have increased a hefty 1500%, 23% last year. With a limited float of only 27,700,000 and a conservative discounted cash flow value of $3.53, China Sun’s recent $1.50/share should easily triple when institutional buyers seek new investment opportunities as the consumer re-emerges from the world wide recession.

Full Disclosure: Author holds a position of CSGH in his portfolio.

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