China Digital Trades at Discount

BEIJING (TheStreet) -- Every so often I see individual stocks whose valuations simply do not make sense. Most recently I came across China Digital Communications(CMTP Quote), which is based in Shenzhen, China.

To gain some perspective on a target valuation, I compared CMTP to China Bak Battery(CBAK Quote), Advanced Battery Technologies(ABAT Quote) and to Hong Kong Highpower Technology(HPJ Quote).

And to make sure I wasn't missing anything important on CMTP, I went to Shenzhen to meet with company management and tour their factory.

Battery shells and caps production line

My conclusion from all of this is that China Digital's valuation should fall roughly in the middle between CBAK and ABAT, which would place it on a P/E multiple similar to that of HPJ. These are three very solid data points that all point in the same direction. The fact that it is still trading at a significant discount creates a very strong buying opportunity.

For a valuation comparison, CBAK, also based in Shenzen, is currently trading at around $3 per share, has a $170 million market cap, and currently has gross margins of around 11% despite the fact it is unprofitable. On the balance sheet, CBAK has over $150 million of debt due within 12 months and only $30 million of cash. CBAK has $40 million of long-term debt. On the expansion side, CBAK has recently announced it is building a factory in India.

ABAT is currently trading at about $4 with a market cap of $240 million. ABAT is profitable and has high gross margins of 40% to 50%. On the balance sheet, ABAT is very strong, having raised significant equity financing over the past year at stock prices in the $4-$5 range.