China New Energy a Buy, Ignore the Math

BEIJING (TheStreet) -- The past 12 months have been very volatile for China battery makers including Advanced Battery Technologies (ABAT), Hong Kong High Power (HPJ), New Energy Systems (NEWN.OB), China Ritar (CRTP) and China Bak Battery (CBAK). After six months of sitting on the sidelines and doing plenty of analysis, I recently bought back into New Energy Systems and view it as a stock with the potential to double.

I have owned shares of New Energy Systems off and on for about a year. I have a very favorable view of management, the company and the industry. I have also met with members of management, including the new chairman, on several occasions and toured its Shenzhen manufacturing facility.

The only reason I sold the stock last year was because I didn't fully understand the math behind its two recent acquisitions. The company issued around 7 million shares in order to complete two significant acquisitions that could generate significant revenue. However, I didn't know if the additional revenue and earnings generated by the acquisitions would be more than offset by the additional shares outstanding.

NEWN presented at the Rodman(RODM) conference in Beijing and gave a detailed breakdown of incremental income vs. share dilution as well as guidance on its expected performance for 2009 and 2010.

Before taking a closer look at New Energy Systems, it is important to note that every online financial site still has outdated information on the company. I have checked Bloomberg, Reuters, Google and Yahoo! and all show approximately 5 million-6 million shares outstanding when the real number is now 12.6 million. Obviously this has very important implications for valuing the company.

NEWN is set to release annual results within days and has already given "guidance" of earnings of $5.3 milion-$6.0 million, excluding non-cash charges. Normally I don't place too much weight on guidance, but this "guidance" was released in March, two and a half months after the fiscal year end and the company have re-affirmed it three times, so I am reasonably confident that it will be accurate.

It is important to note that when earnings are releases, the bottom-line EPS number will be lower than forecast due to non-cash charges related to the acquisitions and issuance of shares. There are two reasons why I will ignore those charges completely.