Stock research on global mid-cap companies

Evaluate Research

Evaluate Research provides institutional quality stock research on small-cap and  mid-cap companies on a global basis, thus helping connect investors with the company.

At Evaluate Research, we provide free of cost to all investors a 20-25 page Initiation Report which evaluates in great detail all aspects of the company:  growth opportunities, catalysts, business description, competitive positioning, SWOT analysis, risks, etc.  In addition, we determine specific price targets for the company based on detailed 5-year complete forecasts of financial statements including IS, BS, CF, ratios, etc.  Finally, whereas many sell-side brokers offer sketchy and irregular ongoing maintenance research of companies, if not outright dropped or termination of coverage, at Evaluate Research we systematically monitor and regularly publish Update Notes covering quarterly earnings, major corporate events, etc.

All of the research reports are broadly and freely disseminated globally to leading Fund Managers and analysts who invest specifically in mid-size equities, and also on leading investment information platforms including: Bloomberg, Thomson Reuters, FactSet etc.

Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

Leoch International Technology / Equity Bottom-Up

We are reiterating our investment thesis, rating and price target on Leoch International Technology Ltd. [842_HK; HK$631 million/US$82 million market cap; HK$0.3 million total average daily value traded], and believe the stock is trading at very attractive “deep value” levels.&nbsp; As part of our ongoing effort to provide high quality, consistent and objective research coverage, we are issuing a 21-page “Updated Initiation Report” on the stock.&nbsp; This report reassesses our overall thesis, and refreshes our original 39-page Initial Report from December 2016, and makes it easier for new investors [and even existing] to understand the company and its prospects.&nbsp; We have also been publishing regular Earnings Update Reports on them since March 2017. &nbsp;Evaluate Research remains the only company following Leoch International Technology Ltd., and while most research providers will not take the time and effort to reissue a very detailed Initiation Report, we believe it is important to have timely and updated research on all the companies we cover.
Leoch is a vertically integrated enterprise, headquartered in China, primarily engaged in the development, sale and manufacture of lead acid batteries. It is one of the leading manufacturers and exporters of lead-acid batteries in the PRC. The company has a strong international presence and in FY2019, it generated about 38% of its revenue from countries other than the PRC. With strong R&amp;D capabilities, Leoch is one of the few companies that possess the third generation pure lead battery and the fourth generation start-stop battery technologies. The company operates eight production facilities which include four wholly-owned facilities in the PRC, a wholly-owned facility in Sri Lanka, two joint-venture facilities in Malaysia and a newly established joint-venture facility in India, with a total site area of approximately 1,000,000 square meters.
Maintain PT at HK$1.00; 113% Upside
We maintain a one year PT on Leoch at HK$1.00 per share implying an upside of 113% over the current stock price of HK$0.47. Our price target implies a P/E multiple of 12x on our FY2020 EPS estimate of RMB 7 cents and an EV/ EBITDA multiple of 6X on our FY2020 EBITDA estimate of RMB495 mn. With all the negatives factored into the stock price along with secular tailwinds provided by the recent 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 5x P/E and 5x EV/EBITDA based on our FY2020 EPS and EBITDA estimates, respectively.
Expect Sharp Recovery in Recycled Lead Business in FY2020
Revenue from recycled lead products segment declined by 31.6% to RMB971 mn in FY2019 (FY2018: RMB1419 mn). The recycled lead business remained affected by the production disruption of its lead recycling facility amidst the expansion project the construction of which was started in the third quarter of 2018. Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility will resume operation in the first half of 2020 after which revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
5G: A Big Market Opportunity for Leoch
Being a global supplier of power solutions for telecommunications and data center industries, we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years. The new lithium-ion battery business infrastructure has been fully constructed during 2019 with test run successfully undergone. This has equipped the group to get set for the upcoming 5G orders which are expected to start crystallizing in 2020. Since the outbreak of the pandemic in China, usage for online data &amp; services have substantially reduced, as China Mobile reviewed recently that the average revenue per user, sales, online usage and voice usage including international roaming have dropped materially. It has scaled back capital expenditure in 5G base station infrastructure, and so have China Unicom and China Telecom. The Group will take this as a motivational challenge and continue to improve both its product quality and customer service to stay afloat these revised 5G capex plans. To capture timely opportunities by diversification, the Group has commenced production of lithium-ion batteries in Anhui.&nbsp; It is expected that the lithium-ion battery production capacity will be increased to 1.8GWh during the year and from that to 4GWh gradually over the next few years. (More details below)
Leadership Position in China Reserve Power Market
The major application areas for reserve power batteries include telecommunications, uninterrupted power supply [UPS] systems, renewable energy storage and consumer products. Telecom is the dominant application area with 41% of the reserve power batteries being used in this sector, followed by UPS which accounts for 38% of the total. Leoch, which generates more than 50% of its revenue from the reserve power segment, is one of the leading manufacturers of reserve power batteries in China. More than 50% of this revenue comes from the sale of telecommunication application batteries in the PRC. Leoch is the market leader in this business with 30% of the share in the PRC (in terms of sales turnover). This will be a big positive for the company providing it with lower costs due to economies of scale. Development of the 5G network will provide additional boost to the demand for telecommunications batteries over the next few years. With the rapid development of IT technologies such as cloud computing, big data, ecommerce and various types of data centers and servers, we expect to see continued strong growth in the market for reserve power batteries. We believe that Leoch will continue to benefit from the growth in the reserve power market and will maintain its market share by leveraging its competitive advantage achieved through its technological leadership and strong customer relationships.
On an important note, we believe that Leoch’s reserve power business in China remains fairly insulated from any existing or future overcapacity situations in the industry. Excess capacity gets built up in the SLI segment as more than two-thirds of the sales occur in the aftermarket category in which the buyers are generally very small and fragmented and cost considerations mean more than quality. By way of design, excess capacity is difficult to get built up in the reserve power business. In telecommunication batteries for example, the buyers generally are the large telecom companies that choose their suppliers very discriminately and are much more quality conscious.&nbsp; Thus, proven track record of quality, timely delivery, ability to handle large order size etc. along with strong relationships are essential here, making it quite difficult for new or small companies to easily compete in this space. To reiterate, as reserve power accounts for 50%+ of the company’s total revenue, Leoch’s business remains and will continue to remain much more secure and stable vs. other lead-acid battery companies that are more entrenched in the SLI business.
Strong International Presence 
The company has a strong international presence and it markets and distributes its products to more than 100 countries across the world. On a consolidated basis, China is the company’s largest market, accounting for about 62% of its revenue in 2019. This is followed by EMEA and the US accounting for 17% and 12% respectively followed by Asia at 9%. The geographical diversification shields the company from local regulatory and economic risks. The company operates eight production facilities which include four wholly-owned facilities in the PRC, a wholly-owned facility in Sri Lanka, two joint venture facilities in Malaysia and an established joint venture facility in India, with a total site area of approximately 1,000,000 square meters. As of 2019, the company had a maximum production capacity of 20 million KVAh. In future, the company will continue to expand its production and manufacturing capacities overseas in order to further expand in those markets.
For further details please see our attached detailed Updated Initiation Report.
&nbsp;

We are reiterating our investment thesis, rating and price target on Leoch International Technology Ltd. [842_HK; HK$631 million/US$82 million market cap; HK$0.3 million total average daily value traded], and believe the stock is trading at very attractive “deep value” levels.&nbsp; As part of our ongoing effort to provide high quality, consistent and objective research coverage, we are issuing a 21-page “Updated Initiation Report” on the stock.&nbsp; This report reassesses our overall thesis, and refreshes our original 39-page Initial Report from December 2016, and makes it easier for new investors [and even existing] to understand the company and its prospects.&nbsp; We have also been publishing regular Earnings Update Reports on them since March 2017. &nbsp;Evaluate Research remains the only company following Leoch International Technology Ltd., and while most research providers will not take the time and effort to reissue a very detailed Initiation Report, we believe it is important to have timely and updated research on all the companies we cover.
Leoch is a vertically integrated enterprise, headquartered in China, primarily engaged in the development, sale and manufacture of lead acid batteries. It is one of the leading manufacturers and exporters of lead-acid batteries in the PRC. The company has a strong international presence and in FY2019, it generated about 38% of its revenue from countries other than the PRC. With strong R&amp;D capabilities, Leoch is one of the few companies that possess the third generation pure lead battery and the fourth generation start-stop battery technologies. The company operates eight production facilities which include four wholly-owned facilities in the PRC, a wholly-owned facility in Sri Lanka, two joint-venture facilities in Malaysia and a newly established joint-venture facility in India, with a total site area of approximately 1,000,000 square meters.
Maintain PT at HK$1.00; 113% Upside
We maintain a one year PT on Leoch at HK$1.00 per share implying an upside of 113% over the current stock price of HK$0.47. Our price target implies a P/E multiple of 12x on our FY2020 EPS estimate of RMB 7 cents and an EV/ EBITDA multiple of 6X on our FY2020 EBITDA estimate of RMB495 mn. With all the negatives factored into the stock price along with secular tailwinds provided by the recent 5G network launch, increasing vehicle penetration in China and increasing demand for light electric vehicles, etc., we continue to remain positive on the stock. At the current levels, the stock is trading at extremely attractive multiples of just 5x P/E and 5x EV/EBITDA based on our FY2020 EPS and EBITDA estimates, respectively.
Expect Sharp Recovery in Recycled Lead Business in FY2020
Revenue from recycled lead products segment declined by 31.6% to RMB971 mn in FY2019 (FY2018: RMB1419 mn). The recycled lead business remained affected by the production disruption of its lead recycling facility amidst the expansion project the construction of which was started in the third quarter of 2018. Leoch undertook expansion from 100k tons per annum to 200k tons per annum in lead recycling capacity to comply with government policy in the third quarter of 2018. The lead recycling facility will resume operation in the first half of 2020 after which revenues are expected to rise sharply in the 2nd half of FY2020 and make up for the lost opportunity.
5G: A Big Market Opportunity for Leoch
Being a global supplier of power solutions for telecommunications and data center industries, we believe Leoch will likely be one of the key beneficiaries of the global 5G revolution, experiencing exponential growth in its backup power solution business for the coming 5-10 years. According to the Global System for Mobile Communications Association (GSMA) it is expected that 52 markets will launch their 5G networks by 2020. China is expected to see total investments on 5G networks reach US$411 bn in the period from 2020 to 2030, with 4.9 mn 5G base stations and 12 mn small cells being installed in the country by 2030. Technologies such as Internet of Things, big data and artificial intelligence have been developing rapidly, driving the growth of the global data center market. By 2020, the global and Chinese data center markets are expected to reach revenue of US$90 bn and US$30 bn respectively, with a 28% CAGR over the next three years. The new lithium-ion battery business infrastructure has been fully constructed during 2019 with test run successfully undergone. This has equipped the group to get set for the upcoming 5G orders which are expected to start crystallizing in 2020. Since the outbreak of the pandemic in China, usage for online data &amp; services have substantially reduced, as China Mobile reviewed recently that the average revenue per user, sales, online usage and voice usage including international roaming have dropped materially. It has scaled back capital expenditure in 5G base station infrastructure, and so have China Unicom and China Telecom. The Group will take this as a motivational challenge and continue to improve both its product quality and customer service to stay afloat these revised 5G capex plans. To capture timely opportunities by diversification, the Group has commenced production of lithium-ion batteries in Anhui.&nbsp; It is expected that the lithium-ion battery production capacity will be increased to 1.8GWh during the year and from that to 4GWh gradually over the next few years. (More details below)
Leadership Position in China Reserve Power Market
The major application areas for reserve power batteries include telecommunications, uninterrupted power supply [UPS] systems, renewable energy storage and consumer products. Telecom is the dominant application area with 41% of the reserve power batteries being used in this sector, followed by UPS which accounts for 38% of the total. Leoch, which generates more than 50% of its revenue from the reserve power segment, is one of the leading manufacturers of reserve power batteries in China. More than 50% of this revenue comes from the sale of telecommunication application batteries in the PRC. Leoch is the market leader in this business with 30% of the share in the PRC (in terms of sales turnover). This will be a big positive for the company providing it with lower costs due to economies of scale. Development of the 5G network will provide additional boost to the demand for telecommunications batteries over the next few years. With the rapid development of IT technologies such as cloud computing, big data, ecommerce and various types of data centers and servers, we expect to see continued strong growth in the market for reserve power batteries. We believe that Leoch will continue to benefit from the growth in the reserve power market and will maintain its market share by leveraging its competitive advantage achieved through its technological leadership and strong customer relationships.
On an important note, we believe that Leoch’s reserve power business in China remains fairly insulated from any existing or future overcapacity situations in the industry. Excess capacity gets built up in the SLI segment as more than two-thirds of the sales occur in the aftermarket category in which the buyers are generally very small and fragmented and cost considerations mean more than quality. By way of design, excess capacity is difficult to get built up in the reserve power business. In telecommunication batteries for example, the buyers generally are the large telecom companies that choose their suppliers very discriminately and are much more quality conscious.&nbsp; Thus, proven track record of quality, timely delivery, ability to handle large order size etc. along with strong relationships are essential here, making it quite difficult for new or small companies to easily compete in this space. To reiterate, as reserve power accounts for 50%+ of the company’s total revenue, Leoch’s business remains and will continue to remain much more secure and stable vs. other lead-acid battery companies that are more entrenched in the SLI business.
Strong International Presence 
The company has a strong international presence and it markets and distributes its products to more than 100 countries across the world. On a consolidated basis, China is the company’s largest market, accounting for about 62% of its revenue in 2019. This is followed by EMEA and the US accounting for 17% and 12% respectively followed by Asia at 9%. The geographical diversification shields the company from local regulatory and economic risks. The company operates eight production facilities which include four wholly-owned facilities in the PRC, a wholly-owned facility in Sri Lanka, two joint venture facilities in Malaysia and an established joint venture facility in India, with a total site area of approximately 1,000,000 square meters. As of 2019, the company had a maximum production capacity of 20 million KVAh. In future, the company will continue to expand its production and manufacturing capacities overseas in order to further expand in those markets.
For further details please see our attached detailed Updated Initiation Report.
&nbsp;

Leoch [842_HK]: 5G Play at 5x P/E, 6x EV/EBITDA - Updated Initiation Report