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China Sun Group: Growth Prospects

China Sun Group's Fu Guosheng reveals plans to supply the raw material for lithium batteries, and produce its own lithium batteries.

JUNAN COUNTY, Shandong Province, China (TheStreet) -- China Sun Group (CSGH) is the second largest manufacturer of cobalt-based materials for lithium-ion batteries in China.

Mr. Fu Guosheng, the company's vice president and COO, recently sat down with

TheStreet

to discuss the company's history and prospects.

TheStreet: Can you provide some background of the company?

China Sun Group, through 100% owned subsidiary

Dalian Xin Yang High-Tech Development Co

, produces cobaltosic oxide and lithium cobalt oxide. We started to produce lithium iron phosphate and plan to expand production over the next three years. We are still focusing on the cobalt products to keep a stable revenue stream. In 2008, we started getting into the new lithium battery industry, producing the new LIP products, which is our major focus in the future, because this is the most cost-effective and high-technology battery in the industry.

What is the status of your cobalt project in Congo? Will margins be substantially helped?

We postponed the Congo project and changed our business strategy accordingly due to the shipping time and changes in the Congo government policies. We will get cobalt in China, not only because it is cheaper in China, but also it saves time because of the geographic proximity of shipping.

Where do you see the company in five years? 10 Years?

We plan to build a unique model to supply the raw material for lithium batteries, and will produce our own lithium batteries, which is one of the major components of future battery-powered automobiles. We will be a holistic provider of the raw materials for auto batteries as well as the finished product for automobiles and electronics.

What are CSGH's competitive advantages?

First, we have advanced technology; we are proud of the automation we have achieved. We have built up our technology over a long time to keep competitors out and do not believe it could be easily duplicated.

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Second, we are creating a multi-production model. We are not only focusing on LIP as a raw material, but also on the finished battery products.

Third, we have substantial cost advantages over our competitors which allow us to produce the same high quality products at a lower price.

Who are your main competitors?

There are many competitors in China as well as in Korea and Japan. In LIP, we think we have a unique position and competitive advantages not only because of the technology exclusive patent, but also because of our holistic production model. Around 40% of lithium iron phosphate will be used within China Sun to produce Power Li-Battery, which sells to major electronics manufacturers. Moving forward, our major clients will be not only Li battery manufacturers looking for lower cost and high quality cobalt oxide sources, but also ourselves.

What is going on with EPS growth? Do you believe it will resume?

Our earnings per share stands at 12 cents in the first nine months of fiscal year 2010; we were taking more aggressive steps in upgrading the production line and we are changing our production lines now. We will have revenue growth going forward. Also, compared with other battery producers, we are trading at a significant discount.

Can you fully explain your segment lines?

We have 12 production lines, which produce our old and new products. For the six old lines we are making lithium cobalt oxide and cobaltosic oxide, which are based on cobalt powder. Those products generate stable revenue and stay a sustainable profit margin. For example, cobalt products maintain their price levels at $37,500 to $39,000 per ton and 20% - 22% profit margin. The other three production lines are for our newly launched products and LIP. Now we are also working on upgrading the other three production lines so that we can have six production lines for LIP as well.

What is the price per ton for LIP?

While there is no international price, the current domestic price in China is ranging from $23,810 to $24,600. This depends on the raw material prices for lithium iron phosphate, which relies on lithium, iron ore and phosphate prices accordingly We expect to produce 160 tons in 2010, 700 tons in 2011 and 1400 tons in 2012.

What is going on with contracts for LIP?

Our current clients are located in Guangdong and Zaozhuang city in Shandong province. China has just released details of its green-car subsidy program designed to boost the nation's auto industry and cut vehicle emissions. Through the program, subsidies of up to $8,784 will be given to buyers of pure electric vehicles in the five cities chosen for the pilot program. We do see lots of potential clients shopping around or asking for future orders recently.

At the time of publication, Buckley was long CSGH.

Zack Buckley is general partner for Buckley Capital Partners Hedge Fund and manages his blog at Uncoveringalpha.com. He developed his investing methodology by synthesizing the ideas from the best investors of all time: Warren Buffett, Peter Lynch, Seth Klarman and Benjamin Graham. Using a value approach, he researched thousands of companies in order to pursue the most undervalued companies, which led primarily to companies in China. Buckley will be spending three months this year in China visiting companies that are exciting investment opportunities. Follow him on his blog, Uncoveringalpha.com, as he travels across China touring factories and interviewing management.