First published in InFocus: UK Quoted Clean Motoring, July 2007. ©  Cleantech Investor Ltd.

China Shoto’s core business is manufacturing back-up power supply batteries for mobile phone transmitters but the fastest growing part of the business is batteries for electric bicycles. According to the Jiangsu Bicycle Association, the electric bicycle market in China grew by 78% in 2006. China Shoto is initially concentrating on supplying the manufacturers. Three companies, Beijing Xinri, Tianjin Taimei and Tianjin Taifeng, account for two-thirds of turnover but China Shoto supplies more than half of the batteries that they put in their bicycles. Longer-term, the replacement market will become more important. The power type battery (PTB) business is carried on by China Shoto’s subsidiary, Jiangsu Best Power Supply Company. It made no contribution to China Shoto’s turnover in 2005 and contributed £20.3m to group turnover of £66.5m in 2006 - that is 30% of the group turnover. It also made operating profits of £1.57m out of group operating profits of £6.1m. In fact most of the increase in China Shoto’s profits in 2006 can be attributed to PTB.

This is particularly impressive because the production line didn’t fully come on stream until May 2006. The production line cost £3.15m to buy and install, against a budget of £3.25m. Gross margins for the electric bicycle business are around 24% compared with more than 30% for the backup batteries business. Because of the high volumes being pushed through the factory, the return on capital employed of 30% is higher than the rest of the group.

Jiangsu Best Power Supply has just completed a 15,768 square metre extension to its factory and production has started earlier than originally planned. This will enable production to be increased from 18,000 units to 24,000 units each day. Management believes that it could increase revenues by 40% because of the sales mix. Last year the company set up new sales and service networks in Tianjin,Zhejiang and Jiangsu provinces. In all it operates from 43 sites. These will help it win more of the replacement market, which will ultimately be bigger than the manufacturing market.

China Shoto’s business is predominantly domestic and exports account for less than 2% of group sales. It made pretax profits before share based payments of £5.4m on turnover of £66.5m in 2006. The higher lead price held back margins in percentage terms, but not in money terms, and also meant that the amount invested in stocks was much higher at the end of 2006. House broker Seymour Pierce forecasts profits of £6.2m on turnover of £80m for the current year. Part of that growth will come from sales to telecoms companies investing in 3G technology prior to the Olympics. Electric bicycle batteries will also be an important contributor, which is set to result in a continued decline in margins.

China Shoto is not only profitable it is also paying dividends. Last year the total dividend amounted to 4.5p a share and the payment is forecast to rise to 5p a share in 2007. At 176.5p, the shares are trading on eight times forecast earnings for 2007, falling to seven based on the 2008 profit estimate of £7.3m.  The forecast yield for 2007 is 2.9%.