CBAT: Recharging its batteries for future growth
NASDAQ:CBAT
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Initiating Coverage
We are initiating coverage of CBAK Energy Technology, Inc. (NASDAQ:CBAT) with a valuation of $1.80. CBAK is an integrated lithium-ion battery company with manufacturing and raw materials divisions in China. The company operates manufacturing facilities in Dalian and Nanjing where they manufacture cylindrical lithium-ion battery cells principally for companies serving the energy storage and portable power markets. The company has just begun an ambitious expansion plan that will continue through 2027.
Energy Storage Markets Are Driving Demand
Demand for energy storage has ramped significantly in recent years and as industrial and grid storage needs emerge demand should accelerate further. The company’s Dalian facility has 1 GW of current annual manufacturing capacity with plans to expand to 16 GWh by 2027 (mostly for larger cylindrical cells including 46-series cells). The majority of the cells produced at this plant today are the company’s most popular model - 26650/26700 cells – produced for the energy storage market. The company’s Nanjing facility is expected to reach 2 GWh of capacity by the end of 2023 (up from 0.7 GWh at the end of 2022) with plans in place to expand to 20 GWh by 2027.
New Products Hold Substantial Promise
The company has reached the prototyping stage with their new 46-series lithium-ion batteries of various lengths (most likely initial models are the 46115 or 46157) and mass production could begin by the end of 2023. We believe the company remains in conversations with several potential customers regarding the possibility of bringing a 46800 cylindrical cell to market in 2024. The company also recently announced plans to begin large-scale production of sodium-ion cells which would make CBAK one of the first companies to commercialize this technology. We believe the company is exploring strategic partnerships to speed up the process of bringing these cells to the market. Valuations of sodium-ion startups are elevated right now and we think there is a good deal of untapped value potentially in the company’s new sodium-ion business.
The Future of the Raw Materials Business is Unclear
The company acquired Zhejiang Hitrans, a battery raw materials supplier, in 2021 when a dispute among Hitrans shareholders created what management felt was an attractive opportunity. We believe that the volatile nature of the commodity business and the thin margins in this business have made it difficult for investors to evaluate the CBAK core battery business. CBAK’s most recent conference call focused almost exclusively on the company’s battery business so we think the company may choose to explore strategic options to unlock the value of Hitrans.
CBAK Needs to Regain Investor Confidence
The company has a long history as a public company and frankly, it has overpromised and underdelivered too often during that period. We believe that is why the market is taking a "wait and see" attitude regarding the announced capacity expansions, the new 46-series cells, and the sodium-ion cell commercialization. Converting press releases into tangible results will be critical to convincing investors that this time is indeed different for CBAK.
Valuation
CBAK has successfully launched lithium-ion battery manufacturing operations and now has a stable battery business. In Q2 2023, uninterruptible battery sales of $21 million nearly equaled the total battery sales of the company for the full year of 2020 ($23 million). As new capacity comes online, adding roughly 75% of additional capacity in 2023 (going from 1.7 GWh to 3 GWh) and 67% of additional capacity in 2024 (going from 3 GWh to 5 GWh) we believe the company is about to enter a period of significant growth. If the company can reach its aggressive expansion goals and achieve 36 GWh of capacity by 2027 the implications for our model are significant. The challenge with valuing CBAK is that the company is significantly smaller than most public battery manufacturers today, its cells are not principally sold to the EV market and the majority of the comparable public companies are profitable. We believed that the revenue mix at CBAK also impacts the valuation as raw material sales are not highly valued by investors and the volatile nature of pricing in that market has made it difficult to build reliable projections.
We are forecasting a return of growth in the battery business for the balance of 2023 and 2024 with total battery sales over $141 million in 2024. Since the Viessmann order for 2024 was equal to $125 million we believe our estimates are very achievable. Discounting the revenues by 10% given CBAK’s size and lack of profitability we arrive at a valuation of $1.45/share for the battery business. We believe the Hitrans business has likely appreciated since the acquisition in 2021 and could be worth over $50 million today, meaning CBAK’s stake of 67% is likely worth roughly $0.35 per share. The value of Hitrans to a strategic investor could be much higher than this estimate, but again we are attempting to be conservative with our forecast. Combining these two figures we arrive at our initial target valuation of $1.80/share or roughly 65% above current trading levels.
If the company completes the first stages of its capacity expansion, we believe our forecasts will likely prove conservative. Additionally, as we enter 2024, investor focus may shift to our 2025 battery revenue forecast which stands at nearly $300 million.
One additional wild card is the company’s sodium-ion battery business which we believe is attracting some attention from outside investors. If the company sold a stake in that business for a substantial sum (recent VC investments in sodium-ion battery startups have had eye-popping valuations) it could materially impact our valuation.
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