A123 Systems Soars on IPO, but Why?

Even if newly public battery maker A123 Systems (AONE) soars in the aftermarket, don't feel too bad about being left out of the IPO party, because there are much smarter ways to play the lithium-ion battery market.

A123 Systems priced its $378 million IPO Wednesday night, selling 28.1 million shares at $13.50 each, and the stock began trading Thursday. It closed at $20.29, up $6.79 for a 50.3% gain. Shares were down 10 cents after hours.

The company increased the deal size by almost 10% even after raising the offering price by 50% from the initially indicated range. Like China Bak Battery ( CBAK), A123 is a money-losing company trading on an excessively high valuation.

Profitable alternatives such as Advanced Battery Technologies ( ABAT), China Sun Group ( CSGH), Hong Kong Highpower Technology ( HPJ) and China Digital Communication Group ( CMTP) all make for a better fundamental investment.

In evaluating this IPO, I am a very biased investor because I refuse to invest in money-losing companies. When a company is being well received by investors because its "losses are declining," I don't feel too bad about not being part of the IPO party.

A123 does have an impressive client list, including Chrysler and Black & Decker ( BDK). However, A123 has generated only $168 million in revenue since being founded in 2001. On revenue of $168 million, the company has lost $146 million since founding. I repeat, on revenue of $168 million since 2001, the company has lost $146 million.

Comparing A123 to its rivals shows that A123 got one spectacular deal from its IPO price. A123 will have an initial market cap of around $900 million. Compare this to money-losing CBAK, which now has a market cap of $230 million. CBAK has generated revenue of $225 million in the past 12 months. Over the past year, CBAK has lost about $10 million. Clearly, losing money is now the new trend in investing because CBAK soared 30% yesterday on news of the A123 IPO success.

I think ABAT is a much better investment. With a market cap of $268 million, ABAT trades at only 13 times trailing 12 months'earnings. (yes, that's right, earnings). ABAT was recently awarded a $3.4 million contract for electric vehicles. Despite being a profitable way to play the lithium-ion/electric vehicle market, ABAT rose only 3% yesterday.

China Sun Group ( CSGH) is in the testing phase on lithium iron phosphate, the same product that is giving A123 such a valuation boost. CSGH rose to a new 52-week high yesterday above $1.50 based on the A123 sentiment. CSGH is profitable, cash-rich and debt-free and trades at only nine times earnings.

Notice that A123 includes Black & Decker among its notable customers. Black and Decker is not a vehicle manufacturer, but a hand-held-device maker. As a result, comparing to other small-size lithium ion battery makers (i.e., batteries for hand-held devices) is also appropriate.

HPJ is a leading supplier of nickel metal hydride batteries, and is moving into the lithium ion space. After its recent 50% run-up, the company trades at 17 times earnings, but is profitable and debt free. HPJ rose as much as 10% yesterday.

CMTP, now known as New Energy Systems Group, is profitable, cash rich and debt free and is rapidly expanding in the lithium ion space, but still trades at a P/E of only four times TTM earnings. CMTP also rose nearly 10% yesterday.

A123 may have fantastic technology and a great client list, but until it can demonstrate a clear path toward sustainable profitability, I think it is meaningless as an investment. If A123 were a $100 million company with great prospects, it might be worth some kind of speculative punt. But at $900 million?! Don't feel bad about missing out on this IPO.

In addition to TheStreet.com, I also can be reached at comments@pearsoninvestment.com. Also feel free to leave a comment on my columns by clicking on the button under the headline and below the article. Your comments will appear on the Web site.

At the time of publication, Pearson was long ABAT, CSGH and CMTP.

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.

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