Clearly, numbers like this make it impossible to value A123 in a traditional way, and assumptions are necessary to make any kind of a forecast. To do this, I created a few very generous hypothetical scenarios and tried to answer my original question: "What revenue and margin forecasts are required to justify the current valuation of A123?" I assume a generous, full-year hypothetical 2009 and then compare it to a very generous hypothetical 2011, making assumptions for revenue growth and margin improvement. My analysis looks like this.
How A123 Could Justify Its Multiple
Cost of Product Revenues
% of product revenues
Total operating expenses
% of product revenues
Income tax expense
Implied P/E multiple
*All numbers in US$ millions except percentages.
From the table above, it can be seen that in order to justify a P/E multiple of 100, it will have to do the following things:
transform from negative gross margins to margins of 25%.
maintain operating expenses at current levels with no increase.
pay no income taxes due to tax-loss carry forwards.
If A123 does all of those things, net income should be around $20 million, and the current valuation of $2 billion will represent a P/E ratio of 100. With the exception of the tax losses, none of this seems particularly likely. Compare this with a different lithium-ion battery maker, China Digital Communications. CMTP makes standard lithium-ion batteries for portable devices and has a direct comparable company, Hong Kong High Tech Power ( HPJ). CMTP is highly profitable, with gross margins in excess of 30% and net margins of over 20%. The company has no long-term debt, and the market cap consists of 30% cash. CMTP is in the same business as its Shenzhen neighbor HPJ, but while HPJ trades at a P/E of 21 times trailing 12 months' earnings, CMTP trades at only five times earnings. For CMTP, I can see two reasons why the stock trades at a discount: its fundamentals and close peer. First, CMTP is not Nasdaq-listed. Second, CMTP has no research analyst coverage. To the extent that these factors change, CMTP is easy to benchmark against HPJ and should be trading at a price in the low $20s, up from its current level of only $6-$7. This would place it on a P/E similar to that of HPJ in the low 20s. It is notable that as recently as August, HPJ was an underfollowed company as well and traded at $1.38 (a P/E of 9) when coverage was initiated by Rodman & Renshaw. Less than three weeks later, it traded as high as $3.89.