Editor's note: This is the first column from Rick Pearson, a Beijing-based private investor focusing on U.S.-listed China small-cap stocks.BEIJING ( TheStreet) -- Judging from its latest earnings announcement and conference call, Advanced Battery Technologies ( ABAT) is pursuing a new and less-profitable direction. ABAT essentially is following a business model that will place it squarely in the highly competitive electric-vehicle space rather than in the highly profitable Li-ion battery space. The markets immediately recognized this, driving ABAT down by more than 10% to $3.90 Thursday, and down from a recent high of $5.04 on Aug. 6, a decline of 23%. Over the past year, ABAT has twice diluted shareholders by raising equity/equity-linked financing and intends to use the new funds to expand in a less profitable but more visible and rapidly growing business area, namely electric vehicles via wholly owned subsidiary Wuxi Zhongqiang Autocycle. While ABAT did its best to post nice-looking numbers, the underlying deterioration of its business model is clear. Revenue rose 29% to $13.8 million from last quarter, primarily on increased sales of its wholly owned subsidiary, Wuxi ZQ. As a result, even with Wuxi ZQ sales accounting for only 26% of revenue, total gross margin fell from 50.8% to 45.8%. Sales via Wuxi ZQ are expected to comprise an ever growing-portion of ABAT sales, resulting in increasing pressure on its gross margins. Moreover, while profit increased a seemingly impressive 122% to $8 million quarter over quarter, the increase was due to a one-time gain of $9.9 million on the purchase of Wuxi ZQ. It's unclear how that gain was calculated. Excluding the one-time gains, net profit would have been $1.3 million, a decrease of 50% quarter over quarter, representing a net margin of only 10%.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider ABAT, CBAK and CSGH to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.