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CBAK Energy Technology: Effective Growth Strategy To Counter Raw Material Price Hikes Challenges With Supply Chain Integration Supported By Strong Market Demands & Increased Production Capacity

31 May 2022

On May 19, 2022, CBAK Energy Technology, Inc. (Nasdaq: CBAT), a leading China-based lithium-ion battery manufacturer and electric energy solution provider released its first quarter earnings ended March 31, 2022.

Momentous Revenue Growth 

CBAT kicked off 2022 with net revenues in 1Q-2022 surging more than eight-fold year-over-year to reach $80.2 million; of which, $65 million was from lithium battery cells materials business acquired from Hitran's merger completed in 4Q-2022. Nevertheless, demand for CBAT's high power lithium batteries has continued to prove robust.

Sales of the Company's high-power lithium-ion batteries increased ~70% year-over-year in the fourth quarter of 2022, especially driven by the Light Electric Vehicle end-product application, as well as by the continued momentum in its Uninterruptible Supplies products, achieved even when CBAT was still ramping up production capacity at its Nanjing battery manufacturing facility.

CBAK Energy's production facilities, both in Dalian and Nanjing, currently have a total battery production capacity of 2GWh, and its Nanjing facility is ramping towards a maximum capacity of 18GWh. Based on the strong lithium batteries sales registered in 1Q-2022, CBAT has tremendous potential to multiply its battery sales once the facility has reached its maximum production capacity, supported by strong market demand from the EV and LEV battery ecosystem.

Strong Order Backlog with More Larger Orders Expected in The Near Term

Owing to the positive market feedback on the Company's products, CBAT has an order backlog of approximately $69 million as of May 9, 2022, including the order for lithium-ion batteries supply worth of ~$29.3 million from a leading European provider of heating, cooling and renewable energy systems company, to be met by the full capacity at its main factory in Dalian, together with increased production at its Nanjing plant. 

CBAT also expects to receive more orders in the coming quarters, and some in bigger orders starting in the 3rd quarter of 2022.

Recent Product Development & 2022 Operating Focus

CBAT continued to develop Large Cylindrical batteries targeting at the LEV and passenger-grade EV markets. The design and R&D for model 42140 battery were completed, and its model prototype production is being worked on catered to the robust market demand.

The Company's main focus in the second quarter is to maintain stable revenues from its uninterruptible supplies and raw material businesses, and will also continue to expand its large-cylindrical batteries through signing new contracts with the LEV and EV manufacturer customers.

Particularly benefiting from the rapidly rising global commodity prices, the new raw material business resulting from Hitran's acquisition has now accounted for a major stream of the Company's total revenues. With reliable product quality, Hitran is able to develop and accumulate a number of strategic customers, and is now in full production and expected to further make high nickel, cathode materials used for EV safety and driving range improvement.

3-Step Strategic Plan to Counter Material Price Hikes and Improve Margins

In order to combat the impact of rising raw material costs which decreased the profitability of its downstream battery production, CBAT management is proactively taking measures in three main aspects:

Step 1. Sign long-term supply agreements with major suppliers to secure major materials supplies.

Step 2. Expand into the upstream raw material business and use material price inflation to offset the decrease in gross margins of battery plants.

Step 3. Renegotiate prices with downstream customers to successfully raise product prices for the Company's key customers.

Management expects the gross margin to improve once its raw-material production capacity and downstream price increases are implemented through the 3-step strategic plan, and subsequently becomes a leading lithium-ion battery and electric energy solutions provider, with secured raw materials and augmented downstream battery production capacity, despite the short-term pressure on the Company's cash flow by the rising material prices.

The Company also plans to actively search for quality assets for value-add acquisitions, aiming at stabilized supply chain and enhanced investment returns.

First Quarter 2022 Financial Highlights

Net revenues were $80.2 million, representing a year-over-year increase of 752%, and a quarter-over-quarter increase of 188%. The increases were mainly driven by incremental revenues from integrating lithium battery materials business post Hitran acquisition, as well as by ~70% year-over-year growth in high power lithium batteries sales.

Additionally in terms of net revenues by end-product applications, revenues from high power lithium batteries used in LEV grew 329% YoY in the quarter.

1Q-2022 gross profit margin was 6.6%, down from 19.5% in 1Q-2021 while up from 3.7% in 4Q-2021, primarily due to the increase in raw material costs, which are expected to abate when new capacity is being added by the overall industry.

Total operating expenses increased 256% YoY, primarily due to growing headcount and consolidation of Hitran; among which, R&D expense in particular increased 585% YoY, coupled with 290% YoY increase in Sales & Marketing expenses. Despite the increases, operating expenses was limited to 8.3% of revenues in the quarter, down significantly from 19.8% from a year ago.

Net income attributable to CBAT shareholders was $0.4 million, compared to $29.6 million in 1Q-2021 when the fair value of its warrant's liability decreased significantly due to lower stock prices, which in turn led to higher GAAP earnings. Change in CBAT warrant's fair value was merely $1.6 million in 1Q-2022, compared to $28.4 million in the same period of 2021. Basic and fully-diluted net income per share were both $0.01 in the quarter, compared to a net income per share of $0.35 in 1Q-2021. 

Cash and cash equivalents were $5.6 million as of March 31, 2022, compared to $7.4 million as of December 31, 2021.

DISCLOSURES AND DISCLAIMERS

Stone Street Group LLC ("Stone Street") publishes research reports on publicly-traded companies. Stone Street has been retained by the Company discussed in this report (the "Company") to provide ongoing digital investor relations services, including the creation and dissemination of this report. All research published by Stone Street is based on public information, or on information from the Company that the Company is required to promptly make public.

Stone Street is not a broker-dealer or a "covered person" under SEC Regulation AC, and does not distribute its research through a registered broker-dealer or any associated person of a registered broker-dealer. Accordingly, Stone Street is exempt from the provisions of Regulation AC. Nevertheless, Stone Street makes the following voluntary disclosures and disclaimers in connection with its research reports:

NO GUARANTEE: This research report is not a substitute for the exercise of an investor's independent due diligence and independent investment determinations. Information contained herein is based on sources we believe to be reliable but we do not guarantee their accuracy. It should be presumed that the analyst who authored this report has had discussions with the Company to endeavor to ensure factual accuracy prior to publication, however, no independent due diligence or verification has been undertaken by the analyst. No endorsements are made in respect of information provided or published by the subject Company and relied upon by the analyst for purposes of this research report. Recipients of this report should consider this report as only one factor in making any investment decision. This report is for information purposes only and is not intended as an offer to sell or a solicitation to buy securities. Any and all information provided by the Company which has been publicly disclosed as "forward looking information" remains subject to all uncertainties in such regard and Stone Street makes no assurances or guaranties of actual outcomes. 

NO CONFLICTS OF INTEREST: Stone Street does NOT own securities of the issuers described herein, and Stone Street does not make a market in any securities. Stone Street does not engage in, or receive compensation from, any investment banking or corporate finance-related activities with the Company discussed in the report. Stone Street's contracts with issuers protect Stone Street's full editorial control of all research, timing of release of reports, and release from liability for negative reports.

ANALYST INDEPENDENCE: Each Stone Street analyst has full discretion on the analysis and revenue targets contained in the report, based on his or her own due diligence. Analysts are paid in part based on overall profitability of Stone Street. No part of analyst compensation was, or will be, directly or indirectly, related to the specific recommendations or views expressed in any report or article. Stone Street policy does not allow an analyst or a member of their household (i) to own, trade, or have any beneficial interest in any securities of any Company that analyst covers, or (ii) serve as an officer or director of a covered Company.

RISK FACTORS: Earnings targets and opinions concerning the composition of market sectors included in this report reflect analyst judgments as of this date and are subject to change without notice. A risk to our earnings targets is that the analyst's estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed in the "Risk Factors" section in the issuer's SEC filings available in electronic format through SEC Edgar filings at www.sec.gov.

COMPENSATION: Stone Street received a flat fee from or on behalf of the Company for the creation and dissemination of the report. Stone Street has not received investment banking income from the Company in the past 12 months, and does not expect to receive investment banking income from the Company in the next 12 months.

ANALYST CERTIFICATION: The research analyst certifies that this report accurately reflects his/her personal views about the Company's securities that none of the research analyst's compensation was, is or will be, directly or indirectly, related to the analyst's specific recommendations or views contained in this research report.

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