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Fri, 02 Sep 2011
Equi ty Research Leoch International (842 HK) Bat tery/ China
Young and growing
Best positioned for opportunities ahead. Ministry of Environmental
Protection launched environmental inspection for lead acid battery and
closed ~60-70% capacity in China. Leoch is least affected as judged by (1)
least affected capacity among HK listed peers and (2) 100% self-sufficiency
of lead electrode plates, vs Tianneng’s 70% & Chaowei’s 85%.
Cooperating closely with giants. Leoch has been working with high quality
client like GS Yuasa, Jaguar, BMW, Mattel, etc. And the company is
increasingly recognized by more world renowned brand like Pep Boys and
Suzuki. We expect the company to gain more exposure for other famous
brand in the future.
Diversified product portfolio, plus upside in China’s motive batteries
market. Unlike other local listed players, Leoch possesses a full range of
battery products on reserve battery, SLI battery and motive battery. The
company targets to expand its exposure in China from currently 46% to 60%
by 2012-13.
Recommend BUY, with target price HK$4.9. We view Leoch as a young
and growing enterprise, who is well positioned to grasp opportunities arisen
from recent environmental inspection. We recommend BUY on Leoch, with
target price at HK$4.9. Our TP implies 7x FY12PE, representing 13%
discount to our 8x target valuation of Tianneng and Chaowei, balancing
between better production facilities but higher execution risk in Leoch’S SLI
and motive power batteries business. The TP valuation is at the lower-end of
the past trading range, which we think is conservative given its 79%
estimated NP CAGR in the next three years.
Antony Cheng
Senior Analyst
+852 2135 0206
Initial Coverage
BUY UNCHANGED
Close price: HK$3.52
Target Price: HK$4.90 (+39%)
Prior TP: NA
Key Data
HKEx code 842
12 Months High (HK$) 5.36
12 Month Low (HK$) 2.95
3M Avg Dail Vol. (mn) 1.65
Issue Share (mn) 1,333.33
Market Cap (HK$mn) 4,693.34
Fiscal Year 12/2010
Major shareholder (s) Dong Li (75.0%)
Source: Company data, Bloomberg, OP Research Closing price are as of 2/9/2011
All figures are subject to rounding
Price Chart
-50
-40
-30
-20
-10
0
10
No
v/1
0
Jan
/11
Mar/
11
May/1
1
Jul/11
%842 HK MSCI CHINA
PE
0
2
4
6
8
10
12
14
Jan
/11
Feb/1
1
Mar/
11
Ap
r/11
May/1
1
Jun
/11
Jul/11
Aug
/11
Forward P/E Ratio
+1std.
avg.
-1std.
Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E
Revenue 1,340.3 2,054.0 3,642.5 5,933.6 8,126.8
Growth (%) (9.7) 53.3 77.3 62.9 37.0
Net profit 94.1 194.6 444.6 775.8 1121.7
Growth (%) 56.4 106.9 128.5 74.5 44.6
Diluted EPS (HK$) 0.085 0.175 0.401 0.699 1.011
Change to previous EPS (%)
NA NA
Consensus EPS (HK$)
0.398 0.605
EPS growth (%) 56.8 106.9 128.5 74.5 44.6
ROE (%) 18.9 9.4 18.1 24.9 27.6
P/E (x) 41.5 20.1 8.8 5.0 3.5
P/B (x) 7.9 1.9 1.6 1.3 1.0
Yield (%) 0.0 0.0 1.7 3.0 4.3
DPS (HK$) 0.000 0.000 0.060 0.105 0.152
Source: Bloomberg, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 2 of 25
Table of Contents
1H11 results review ...................................................................................................................................... 3
Diversified product portfolio, plus upside in China’s motive batteries market ................................................ 4
Benefit from powerful customer base. .......................................................................................................... 6
Best environmental standard, least affected by the closure .......................................................................... 8
Valuation .....................................................................................................................................................10
Financial Summary ..................................................................................................................................... 11
Competitive Analysis ...................................................................................................................................12
Appendix I: What is lead acid battery ..........................................................................................................15
Appendix II: China lead the market .............................................................................................................17
Appendix III: Lead acid battery is a preferred choice ...................................................................................18
Appendix IV: Reserve power benefit from various sectors ...........................................................................19
Appendix V: Ride on the fast vehicles for SLI ..............................................................................................21
Appendix VI: E-bike helps motive power battery .........................................................................................22
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 3 of 25
1H11 results review
Strong interim result released. Leoch released interim results on 23 Aug.
Revenue increased 63.9% YoY to RMB1,547.6mn due to robust growth in sales of
reserve power batteries and in domestic demand in China. Besides, gross profit
and net profit rose substantially by 47.5% and 43.7% YoY, respectively, at almost
the same level. However, gross margin and net margin decreased by 2.59ppt and
1.65ppt YoY mainly due to rise in labour cost.
Exhibit 2: 1H11 segmental revenue breakdown
46.9%
22.2%
1.3%
16.5%
8.1%
0.9%
46.0%
21.8%
2.1%
13.5%11.5%
4.1%
0%
10%
20%
30%
40%
50%
UPS Telecom Renewable Consumables SLI Motive Power
1H10 1H11
Source: Company
Benefited from regulations. As the largest and well prepared reserve power
supplier in China, Leoch benefited from the tightening environmental regulations.
Since most of the lead-acid batteries producers in China were in suspension and
trying to fulfill the requirements of new policies, Leoch got the opportunity to
expand its domestic market. 46.5% of 1H11 revenue was generated in China and
doubled the revenue in China during 1H10.
Product category favored by market. The major composition of 1H11 sales is
reserve power batteries, the same as last year, and sales of SLI batteries and
motive power batteries increased by 3.4ppt YoY. Considering the revenue
breakdown by products, which is 83.5% reserve power batteries, 11.5% SLI
batteries, 4.1% motive power batteries and 0.9% other products, Leoch is holding
quite diversified products which would meet the needs of the market.
Exhibit 3: Interim Results Summary
(RMB mn) 1H11 1H10 yoy 2H10 hoh Comment
Revenue 1,548 944 63.9% 1,172 32.0% High domestic demand and suspension of other producers.
Gross profit 361 245 47.5% 281 28.6%
Gross margin (%) 23.34 25.93 -2.59ppt 23.95 -0.61ppt Increased labor cost.
Net profit 182 127 43.7% 130 40.9%
Net margin (%) 11.79 13.45 -1.65ppt 11.05 0.74ppt Highest net profit margin among listed peers
Source: Company, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 4 of 25
Diversified product portfolio, plus upside in China’s motive batteries market
Diversified product range, less cyclical risk than peers. Unlike other local
listed players, Leoch possesses a full range of battery products on reserve battery,
SLI battery and motive battery. Within the reserve battery category, Leoch is
well-diversified in the telecom and UPS (mainly sold as server batteries in
commercial buildings) markets, with business in motive power coming along as
one of the growth engines.
Since part of its demand came from infrastructural facilities (i.e. telecom station)
and from financially-solid clients, we think that business of Leoch is less cyclical
than Tianneng and Chaowei which sell their products to small distributors.
Increasing sale from motive batteries, poised for higher exposure in
China
As for its motive power batteries, it is building sales and service offices which are
close to customers. In China, it has 11 battery shops.Having satisfied stringent
standards of overseas clients, Leoch targets to expand its exposure in China from
currently 46% to 60%.
Exhibit 4: Diversified product portfolio with high growth in motive power
0
2,000
4,000
6,000
8,000
10,000
FY10A FY11E FY12E
UPS Telecommunications
Renewable energy storage Other consumer and industrial products
SLI Motive power
Sales Volume ('000 Ah)
Reserve
power
Reserve
power
Reserve
power
Source: Company, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 5 of 25
Exhibit 5: 1H11 geographical revenue breakdown
38.3%
20.4% 19.3%17.7%
4.3%
46.5%
18.9% 16.7%13.9%
4.0%
0%
10%
20%
30%
40%
50%
China Europe Asia Ex-China USA Other
1H10 1H11
Source: Company
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 6 of 25
Benefit from powerful customer base.
Cooperating closely with giants. Leoch built up solid relationship with
worldwide famous companies such as GS Yuasa, BMW, China Unicom, etc. More
than 2000 companies in both domestic and international market are its customers.
In the global market, as the supplier of Eaton, Emerson, BMW, and Mattel, Leoch
gained reputation on technology and innovation. And in domestic market, the
company retained a large market share in telecommunications and UPS
industries since it is the 2nd
largest battery supplier to China Unicom, the 3rd
largest battery supplier to China Mobile and also major supplier of China Telecom
and ZTE. Moreover, the five largest customers contributed to 39% of the group’s
revenue in 2010. The company is gaining more giants into its customer mix, like
Suzuki, Pep-boys.
Exhibit 6: Current customer base of Leoch
Source: Company
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 7 of 25
Exhibit 7: Recent development of Leoch
Dec 2010
• Started building work of our new production bases in Anhui, Zhaoqing and Jiangsu, with total land area of 580,000m2
Jan 2011
• Set up HK headquarter and sales team
Feb 2011
• Completed 30% stake acquisition of MSB
• Selected as a composite stock for Hong Seng Composite Index
Mar 2011
• Included in MSCI Composite Index
May 2011
• Completion of 580,000m2 new production bases construction work
Jul 2011
• Accredited by Haojue
Aug 2011
• JV with ACCPURRO Malaysia
• Accredited by Pep Boys
Source: Company
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 8 of 25
Best environmental standard, least affected by the closure
Closure list announced in Aug 2011. Ministry of Environmental Protection
announced a closure list on lead acid batteries manufacturers on 2 Aug 2011. Out
of 1,930 licensed players, 656 (including 252 on running and 405 received
suspension notice) are in production after recent environmental inspection since
April 2011, which equates to ~60 - 70% capacity closure in 2H11. It reinforced our
view that there will likely be supply shortage of ~40 – 50% in 2H11.
Leoch has the highest safety and environmental standards in the industry…
All production plants of Leoch are approved and continuously monitored by
overseas
… and thus Leoch is least affected. We found that most of Leoch production
facilities were least affected among Hong Kong listed players. Only the packaging
facilities in Shenzhen and Dongguan were suspended. And the production
facilities accounted for 3.5% of total capacity only, vs ~7% for Tianeng, we
estimate.
From now on, it is increasingly hard for new players to come to the market, and
existing players are subject to stringent inspection when they start new plants.
We think Leoch is in the best position gain market share in the current industry
landscape, given their better environmental standards and its continual
monitoring by overseas clients.
Highest self sufficiency for electrode plates under its vertically-integrated
production. Electrode plate production constitutes the majority pollution made,
but it comprises only 10-20% COGS. We believe under recent environmental
inspection, majority of electrode plate manufacturers were suspended and thus
the self sufficiency for electrode plate supply becomes a critical issue to lead acid
manufacturers. Leoch produces 100% of electrode plate it needed; whereas
Tianneng and Chaowei produces only 70% and 85% of electrode plate needed.
Since Tianneng and Chaowei are purchasing electrode externally, they may be
subject to input bottleneck as some suppliers may have closed down due to
environmental issue. Leoch, given its vertically-integrated supply chain, it is not
likely to be affect by the possible supply bottleneck in electrode plats.
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 9 of 25
Exhibit 8: Inspected result from Ministry of Environmental Protection
Leoch International (0842.HK)
Source: Company
Anhui
Guangdong
Jiangsu
Anhui plant is running
Jiangsu plant is running
Plants in Zhaoqing is running;
packaging process is done in
Shenzhen and Dongguan plants
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 10 of 25
Valuation
Recommend BUY, with target price HK$4.9. We view Leoch as a young and
growing enterprise, who is well positioned to grasp opportunities arisen from
recent environmental inspection. The company is now trading at 9x FY11PE and
5x FY12PE. We recommend BUY on Leoch, with target price at HK$4.9. Our TP
implies 7x FY12PE, representing 13% discount to our 8x target valuation of
Tianneng, balancing between better production facilities but higher execution risk
in its motive power batteries business. The valuation is at the lower-end of the
past trading range, which we think is conservative given its 79% estimated NP
CAGR in the next three years.
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 11 of 25
Financial Summary
Profit and loss Cash flow
Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E
Revenue 1,340 2,054 3,642 5,934 8,127 Pre-tax profit (adj.) 109 237 541 944 1,365
Taxes paid (9) (23) (33) (96) (168)
EBITDA ( ex-assoc) 152 303 661 1,099 1,554 Depreciation/amort'n 33 44 95 125 153
Depreciation (33) (44) (95) (125) (153) Associates' adj. 0 0 0 0 0
EBIT( ex-assoc) 118 259 566 974 1,401
Net interest inc/(exp) (10) (22) (25) (30) (36) Gross cash flow 132 258 604 972 1,350
Associates' profits 0 0 0 0 0 Capex (81) (225) (600) (400) (400)
Exceptional items/others 0 0 0 0 0 Change in working cap (171) (569) (409) (841) (805)
Pre-tax profit 109 237 541 944 1,365 Free cash flow (120) (536) (406) (269) 145
Tax (15) (42) (96) (168) (243) Dividends 0 0 (30) (89) (140)
Minority interest (0) 0 0 0 0 Investments (12) (8) 0 0 0
Preference dividends 0 0 0 0 0 Disposals 0 0 0 0 0
Share issues 142 1,583 0 0 0
Net profit 94 195 445 776 1,122 Others (112) (425) 0 0 0
Others 0 0 0 0 0 Net cash flow (102) 613 (436) (358) 5
Dividends 0 0 (67) (116) (168) Net cash (debt) start (28) (130) 483 47 (310)
Net cash (debt) at Y/E (130) 483 47 (310) (305)
Retained earnings 94 195 378 659 953 S'holders' funds + MI 497 2,080 2,458 3,117 4,071
Net debt/equity (%) 26 (23) (2) 10 7
Balance sheet ROE decomposition
Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E FY09A FY10A FY11E FY12E FY13E
Cash & deposits 43 900 564 306 411 EBIT margin (%) 8.82 12.61 15.54 16.42 17.23
Trade debtors 340 585 1,038 1,691 2,316 Pre-tax/EBIT (x) 0.92 0.91 0.96 0.97 0.97
Other debtors 0 0 0 0 0 Net profit/pre-tax (x) 0.87 0.82 0.82 0.82 0.82
Inventories 181 688 911 1,483 2,032 Asset turnover (x) 1.23 0.67 0.93 1.15 1.21
Other current assets 82 274 274 274 274 Assets/equity (x) 2.19 1.48 1.60 1.66 1.65
Intangible assets 3 3 3 3 3 ROE (%) 18.92 9.36 18.09 24.89 27.56
Investment, associates and
Other LT assets 63 71 71 71 71
Fixed assets 379 564 1,068 1,344 1,591 Statistics and ratios
Total assets 1,091 3,084 3,929 5,172 6,698 Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E
Growth rate (%)
Trade creditors 163 345 612 997 1,365 Revenue (10) 53 77 63 37
Other creditors 0 0 0 0 0 EBITDA (ex-assoc) 44 100 118 66 41
ST debt 173 417 517 617 717 EBIT (ex-assoc) 45 119 118 72 44
Other current liabs 257 242 343 442 545 Net profit 56 107 128 74 45
LT borrowings 0 0 0 0 0 Fully diluted EPS 57 107 128 74 45
Deferred taxation and others 1 0 0 0 0 Margins (%)
Other LT liabilities 0 0 0 0 0 EBITDA (ex-assoc) 11 15 18 19 19
Total liabilities 594 1,004 1,471 2,055 2,627 EBIT (ex-assoc) 9 13 16 16 17
Other ratio
Share capital 0 114 114 114 114 Effective tax rate (%) 13 18 18 18 18
Reserves 497 1,966 2,343 3,003 3,956 Dividend yield (%) 0 0 2 3 4
S'holders' funds 497 2,080 2,458 3,117 4,071 Net ROE (%) 19 9 18 25 28
Minorities 0 0 0 0 0 Net gearing (%) 26 (23) (2) 10 7
Total equity 497 2,080 2,458 3,117 4,071 ROA (%) 9 6 11 15 17
Net cash (debt) (130) 483 47 (310) (305) Interest coverage (x) 12 12 23 32 39
Total cap employed 498 2,080 2,458 3,117 4,071 Debtors (days) 93 104 104 104 104
Creditors (days) 44 61 61 61 61
Inventory (days) 49 122 91 91 91
Source: Company, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 12 of 25
Competitive Analysis
Growth path
Past
Sales by product (FY10)
Leoch commenced operation in 1999 and initially focused on the
international market as a leading lead-acid battery exporter. Besides, It
was China's largest exporter of lead-acid battery products in 2009.
Leoch listed on the main board of Stock Exchange of Hong Kong Limited
on 16 November 2010 and became a component stock of the Hang Seng
Small to Mid Cap Composite Index on 7 March 2011.
UPS, 47%
Telecommunications, 24%
Renewable Energy
Storage, 2%
Other Consumer and
Industrial Products, 15%
SLI, 7%
Motive Power, 1% Others, 3%
Present
Sales by market (FY10)
Leoch is the largest lead-acid battery exporter and the largest reserve
power supplier in China. Moreover, it is growing solidly in China's
lead-acid battery market with 2009-2012E CAGR of 18.2%.
China, 42%
U.S., 16%
European Union, 19%
Other Asian Countries, 19%
Other Countries, 4%
Future
Sensitivity analysis (%)
The Chinese market is expected to expand to 100 billion RMB in 2011.
And Leoch is dedicated to strike for the top 5 role lead acid battery
manufacturer in the world with its experience from overseas and the cost
advantage of labour in China.
Lead price Lead price
FY11 FY12 up 10% down 10%
ASP 464 501 589 420
Revenue 3,642 5,934 6,990 4,966
SG&A -368 -630 -742 -527
EBITDA 661 1,099 1,286 928
EBIT 566 974 1,161 803
Net profit 445 776 929 635
Competitive analysis
Substitutes
Competitive threats
Lithium battery and nickel battery are substitute, but lead acid battery
performs better on the recycle side and the economic side.
Leoch leveraged on its experience from overseas and the comparative
cost advantage on labour in China to strike for top 5 lead acid
manufacturers in the world. We view Leoch as a fast growing company,
with a complete product range as compared with other local listed peers.
With recent environmental inspection, we believe the new entrant will be
limited and it is likely for leaders like Leoch to capture market share by
expanding capacity or M&A.
While Leoch customers are mainly industrial players, the ability to
transfer cost surge is not so high when compared with retail use battery
like those for E-bike. Yet, when Leoch expand its foothold onto other
segment like E-bike battery. The bargaining power will improve.
New entrants
Entry barrier is high after the nationwide environmental inspection. Every
new lead acid battery capacity need to be approved by provincial
environmental protection bureau. Besides, new players need to fulfill
environmental requirement by implementing facilities which cost
RMB5mn+, which set a barrier on capital. Customers
Leoch faces mainly enterprise clients, including world renowned players
like Emerson, BMW, Mattel, etc. Bargaining power is not too high
compared with local listed peers like Tianneng and Chaowei who face
mainly retail clients.
Suppliers
Lead is the main materials: ~80% of lead consumed in China are used in
lead acid battery. Lead is readily available in China. The company
purchase lead from middle man.
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 13 of 25
Management
4
5
33
3
Vision
Growth strategy
Financial prudenceTransparency
Alignment with minority shareholders'
interest
5: Best; 1: Worst
Vision: the company strikes to become top 5 lead acid manufacturers in
the world and management comprises expert in different field. Vision is
good for Leoch
Growth strategy: the company set to increase its capacity at 58% in
FY10 - FY13 and plans to penetrate different battery application in China
for the growth
Financial prudence: the company net gearing is low after its IPO last
year. And the company is able to finance its CAPEX plan by cash on
hand til 2013.
Transparency: the company was listed in 2010, no track record can be
found.
Alignment with minority shareholder: the company was listed in 2010,
no track record can be found.
Risk
5
2
44
5
Industry
Business
ManagementExecution
Regulation
5: High risk; 1: Low risk
Industry risk: industry risk is high as PRC government is dedicated to
consolidate the industry and reduce pollution from the industry.
Business: Leoch is following international standard, thus we believe it
will be the survivor and likely a consolidator.
Management: The company is young and growing, major decision is
done by key management.
Execution: the company has a robust growth plan and execution of the
plan is not easy for a capacity CAGR at 56% in FY10 - FY13.
Regulation: PRC government may further tighten the entry barrier for
lead acid battery manufacturers.
Source: Company, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 14 of 25
Exhibit 9: Peer Group Comparison
bloomberg Year Mkt Cap Price PER (x) P/B (x) Yield (%)
code End (HKD mn) (HKD) FY10A FY11E FY12E FY10A FY11E FY12E FY10A FY11E FY12E
Hong Kong
TIANNENG POWER
819 HK 12/2010 5,013 4.60 11.9 6.5 5.3 2.1 1.7 1.4 2.6% 4.6% 5.7%
CHAOWEI POWER
951 HK 12/2010 4,453 4.43 7.2 8.6 6.3 2.9 2.2 1.8 2.0% 3.5% 4.8%
LEOCH INTERNATIO
842 HK 12/2010 4,693 3.52 20.1 8.8 5.0 1.9 1.6 1.3 0.0% 1.7% 3.0%
COSLIGHT TECH
1043 HK 12/2010 1,003 2.68 111.2 7.3 4.7 0.6 - - 0.0% 0.0% 0.0%
Average
3,791
37.6 7.8 5.3 1.9 1.8 1.5 2.3% 3.3% 4.5%
Median
4,573
16.0 7.9 5.2 2.0 1.7 1.3 1.0% 2.6% 3.9%
A share
FENGFAN CO-A
600482 CH 12/2010 8,258 17.91 141.9 67.9 45.0 6.3 - - 0.0% 0.0% 0.0%
SHANDONG SACR-A
002580 CH 12/2010 2,482 33.04 34.3 35.8 26.2 6.7 2.3 2.1 0.0% 0.4% 0.3%
CHONGQING WANL-A
600847 CH 12/2010 1,528 17.23 -93.8 - - 31.1 - - 0.0% 0.0% 0.0%
ZHEJIANG NARAD-A
300068 CH 12/2010 6,990 23.49 68.2 81.0 38.8 2.3 - - 0.4% 0.0% 0.0%
SHENZHEN KSTAR-A
002518 CH 12/2010 4,785 41.61 39.4 35.5 26.1 3.4 2.3 2.2 0.8% 0.0% 0.0%
Average
4,809
70.9 55.0 34.0 10.0 2.3 2.2 0.6% 0.4% 0.3%
Median
4,785
39.4 35.8 26.2 6.3 - - 0.0% 0.0% 0.0%
Source: Bloomberg, OP Research
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 15 of 25
Appendix I: What is lead acid battery
Lead-acid batteries, invented in 1859 by French physicist Gaston Planté, are the
oldest type of rechargeable battery. Despite having a very low energy-to-weight
ratio and a low energy-to-volume ratio, their ability to supply high surge currents
means that the cells maintain a relatively large power-to-weight ratio. These
features, along with their low cost, make them attractive for use in motor vehicles
to provide the high current required by automobile starter motors.
Components of Lead-acid Battery.
The modern Lead acid battery is made up of:
A resilient plastic container which is usually polyethylene, but increasingly is
made from alternative co-polymers or reinforced, but the case material can
also be metallic or a synthetic rubber.
Positive and negative internal lead plates. The positive electrode (cathode)
typically consists of pure lead dioxide supported on a metallic grid, whereas
the negative electrode (anode) consists of a grid of metallic lead alloy
containing various elemental additives that includes one or more of the
following and sometimes others not mentioned, antimony, calcium, arsenic,
copper, tin, strontium, aluminum, selenium and more recently bismuth and
silver. These alloying elements are used to change grid strength, corrosion
resistance, reduce over-potential or maintenance, and internal resistance.
Porous synthetic plate separators are increasingly made from rib-reinforced
polyethylene, but are also available in PVC and fiber glass.
The plates are immersed in a liquid electrolyte consisting of 35% sulfuric acid
and 65% water. It is the electrolyte that facilitates the chemical reactions that
enable the storage and discharge of electrical energy and permit the passage
of electrons that provide the current flow.
The positive and negative lead terminals used to connect the battery to the
car and pass the current from the individual cells via a series of connecting
lugs and bridges.
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 16 of 25
Exhibit 10: Structure of lead acid battery
Source: yahoo.com
Classification by usage:
Reserve power batteries are used to provide backup power for continuous
power supply in case of primary power source failure or outage and to store
electricity generated by an attached source. Reserve power batteries are
primarily used in telecommunications systems, UPS, electric utilities systems,
and other consumer and industrial applications, as well as in power storage
systems for the recently fast-growing renewable energy industry;
Motive power batteries, mainly provide power for motion and are used in
vehicles such as trucks, forklifts, mini vans, tourist coaches, and golf carts, as
well as electric and hybrid automobiles, electric bicycles and motorcycles;
SLI batteries, are used for the starting, lighting and ignition of vehicles such
as cars, motorcycles, tractors and boats or other internal combustion
engines.
Classification by technology:
Flooded or vented batteries, which require periodic watering and
maintenance; and
VRLA batteries, which are maintenance free. VRLA batteries can be further
categorized into:
AGM VRLA batteries, which are the most common VRLA batteries. TPPL
VRLA batteries and spiral pure lead batteries, which have higher energy
density, are two advanced product types in this category;
Gel VRLA batteries, which have longer life and higher tolerance for extreme
environmental conditions. Tubular gel VRLA battery is an advanced product
type in this category.
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 17 of 25
Appendix II: China lead the market
China is the largest lead-acid battery producing country in the world,
accounting for 41.9% of total global production in 2009. China’s total production in
2009 was 156.1 million KVAh, of which 142.3 million KVAh (91.2%) was
consumed domestically and 13.8 million KVAh (8.8%) was exported abroad. With
~RMB500 ASP per KVAh, we expect the market size to be ~RMB100bn in China.
Exhibit 11: China lead acid battery market
15.6 25.9 37.2 45.9 52.2 61.6 73.588.3
24.933.7
40.344.6
49.758.4
68.8
81.3
13.6
19.6
26.230.9
40.4
46.6
54.9
65.5
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010E 2011E 2012E
Motive Power SLI Reserve Power
(KVAh mn)
Source: Asia Battery Association
18.5% CAGR in 2009 – 2013 in China. Market size is expected to be
235mnKVAh in 2013 in China, implying 18.5% CAGR VS. 3.5% CAGR for the
global market. According to Asia Battery Association, China will contribute 61% of
the world lead acid battery market in 2013 from currently 42%.
Usage of lead acid battery. In terms of 2009 sales volume, reserve power
batteries, SLI batteries, and motive power batteries accounted for 28%, 35% and
37%, respectively, of China’s demand for lead-acid batteries.
Exhibit 12: China lead acid battery market
36.7%
28.4%
34.9%
Motive power batteries Reserve power batteries SLI batteries
SLI batteries 49.7 million KVAh
Motive power batteries 52.2 million KVAh
Reserve power batteries40.4 million KVAh
Source: Asia Battery Association
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Appendix III: Lead acid battery is a preferred choice
Lead acid is cost effective. According to the Asian Development Bank,
lead-acid batteries are still the most cost-effective option. While advantages on
Li-ion is its mass. For indoors use, Ni-MH or Li-ion may be preferred. The shorter
life of Ni-MH batteries may not justify the higher cost to some users. Li-ion
batteries are expensive but only with 1.6x longer lifen compared to lead acid
batteries. With price going down, Li-ion could be cost-effective in the future.
Exhibit 13: Comparison between rechargeable batteries
Results Lead-acid Ni-MH Li-ion
Cost ($) 130 270 500
Mass (kg) 26 14 8
Lifetime (yr) 1.5 (3 ideal) 2.0 (4 ideal) 4.5 (9 ideal)
Volume (L) 10 4 5
Maximum Theoretical Power (kW) 6.2 - 2.9
Recharging Safety High High Low
Temperature Effects Moderate High Moderate
Assumptions VRLA Ni-MH Li-ion
Specific Energy (Wh/kg) 35 65 110
Energy Density (Wh/L) 86 235 170
Power Density (W/kg) 240 - 350
Cost ($/kWh) 130 300 560
Cycle Life (recharges) 300 400 800
Life-Cycle ($/kWh/recharge) 0.43 0.75 0.70
Source: Asia Battery Association
Near term replacement is not plausible for E bike. A good example to illustrate
this is on E-bike market: currently, lithium battery takes ~5% of market share in
E-bike battery. The battery is priced at 200 – 300% higher than lead acid’s; while
it outperform lead-acid by ~200% longer life span. But the drawback is that lithium
cannot be recycled. Without a technology breakthrough, it stands a slim chance
for lithium battery price cut. A typical E bike cost ~RMB2,000, by replacing lead
acid battery by lithium’s, the cost surge will be ~RBM1,000.-
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Appendix IV: Reserve power benefit from various sectors
17.5% CAGR in reserve power. Market demand for reserve power batteries in
China grew at a CAGR of 31.3% from 2005 to 2009, driven by the rapid
development of telecommunications facilities, upgrading of electrical grids,
computer usage penetration and railway construction. In 2009, 39.8% of the
reserve power lead-acid batteries in China are used in telecommunications
systems, 33.4% in UPS, 12.2% in electric utilities, 9.3% in railways, and 5.3% in
other uses. It is estimated that reserve power battery market will grow at 17.5%
CAGR from 2009 to 2012, with the market size reaching 65.5 million KVAh by
2012.
Exhibit 14: China reserve power lead acid battery demand
13.6
19.6
26.2
30.9
40.4
46.6
54.9
65.5
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010E 2011E 2012E
(KVAh million)
Source: Asia Battery Association
Growth drivers for reserve power:
Telecommunications. Telecommunications markets is growing in China.
Upgrade in 3G in telecommunication in recent years also helps. The total
Chinese investment in 3G in 2009 was ~RMB150.0 billion, and is expected to
grow to ~ RMB400.0 billion from 2010 to 2012
UPS. UPS provide emergency power when the primary input power source
fails. UPS are widely used on high-precision instruments, medical equipment,
security monitoring, network systems, and automated production lines, and
are used in industries such as finance, healthcare, utility, government,
technology and transportation.
Electric utilities. The electric utility industry is a key industry in China, and it
is in a new phase of increased structural adjustment with accelerated
upgrading and construction of urban power grids.
Railways. Railway construction is a key focus of China’s infrastructure. In
accordance with China’s Mid-to-long-term Railways Network Plans, China’s
national rail network will increase to 120,000 km by 2020.Lead-acid batteries
are used mainly in railway signal systems and train illumination systems.
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Renewable energy. Lead-acid battery manufacturers have a new market
opportunity to meet the demand in renewable energy, such as in wind and
solar power. Energy storage batteries are one of the key equipment items of
energy storage systems. From 2005 to 2009, China’s installed wind power
capacity has increased at a CAGR of >100.0% and installed solar power
capacity has increased at a CAGR >40.0%.
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Appendix V: Ride on the fast vehicles for SLI
17.8% CAGR in SLI. Market demand for SLI batteries in China grew at a CAGR
of 18.9% from 24.9 million KVAh in 2005 to 49.7 million KVAh in 2009, primarily
driven by the rapid development of the automobile and motorcycle industries. In
2009, over 80.0% of SLI lead-acid batteries are used in automobiles and
approximately 15.0% are used in motorcycles. It is estimated that China’s SLI
battery market will keep growing at a CAGR of 17.8% from 2009 to 2012, with the
market size reaching 81.3 million KVAh by 2012. The chart below sets forth
China’s market demand in terms of KVAh for SLI batteries for theperiods
indicated.
Exhibit 15: China SLI battery market size
24.9
33.7
40.344.6
49.7
58.4
68.8
81.3
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010E 2011E 2012E
(KVAh million)
Source: Asia Battery Association
Growth drivers for SLI:
Automobiles. In the past ten years, China’s automobile industry saw rapid
development and rising penetration rate of automobiles. China is currently
the largest producer of automobiles and is the largest automobile market in
the world, according to China Association of Automobile Manufacturers. The
rapid growth of China’s automobile market provides a huge market and
strong growth potential for automotive SLI lead-acid batteries.
Motorcycles. China is also the world’s largest motorcycle producer and
market, according to China Association of Automobile Manufacturers.
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Appendix VI: E-bike helps motive power battery
19.2% CAGR in motive battery. Market demand for motive power batteries in
China grew at a CAGR of 35.2% from 15.6 millionKVAh in 2005 to 52.2 million
KVAh in 2009, primarily driven by the rapid development of light electric vehicles
such as electric bicycles and motorcycles. In 2009, over 90% of the motive power
lead-acid batteries in China were used in light electric vehicles. Further, the
Chinese government’s support of the development of electric and hybrid vehicles
is also expected to foster more demand for motive power batteries. It is estimated
that China’s motive power battery market will keep growing at a CAGR of 19.2%
from 2009 to 2012, with the market size reaching 88.3 million KVAh by 2012. The
chart below sets forth China’s market demand in terms of KVAh for motive power
batteries for the periods indicated.
Exhibit 16: Motive battery market size in China
15.6
25.9
37.2
45.9
52.2
61.6
73.5
88.3
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010E 2011E 2012E
(KVAh million)
Source: Asia Battery Association
Growth drivers for motive battery:
Light electric vehicles. Sales of light electric vehicles including electric
bicycles, electric motorcycles, electric scooters, electric wheelchairs and
others are growing significantly. Among the light electric vehicles, electric
bicycles in China have been the key market and sales of electric bicycles
have increased rapidly in the past few years.
Electric and hybrid automobiles. In recent years, the Chinese government
has incorporated the development of renewable energy vehicles into national
planning. Government authorities have also classified development of electric
vehicles and related motive power batteries as key industries. In 2009, the
PRC State Council announced the “Auto Industry Restructuring and
Revitalization Plan”, and stated the government’s plan to promote the
application of electric vehicles in the public transportation sector. Electric
vehicles and motive power lead-acid batteries required to power them are
expected to become a significant growth opportunity and establish significant
market scale.
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Exhibit 17: Management team
ZHAO Huan
VP, ED
6 years
International Sales
Philip Noznesky
Sales President of LBC
ED
40 years
US Sales experience
Curtis LIU Shuen Kong
CFO
14 years accounting
and finance experience
QIAN Guanghong
VP of Production
Operations
12 years experience
HONG Yu
VP of Procurement
17 years experience
XIONG Zhenglin
VP of R&D
17 years
LIU Yangsheng
INED
40 years experience
in telecom system
AN Wenbin
INED
30+ years experience
in int’l diplomacy
CAO Yixiong
INED
17 years accounting
and finance experience
PENG Xiaomeng
VP and
Chief Engineer of R&D
5 years experience
LI Yujiu
VP of Domestic Sales
20 years experience
Malcolm Howes
Europe Operation MD
26 years experience
in the battery industry
DONG Li
CEO, Chairman, Founder
12 Years industry experience
Outstanding China Non-governmental Entrepreneur
Committee Member of the Youth Committee of All-China Federation of Retuned Overseas Chinese
Source: Company
Fri, 02 Sep 2011
Leoch International (842 HK)
Page 24 of 25
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