By Brian Lantier, CFA

NASDAQ:CBAT

READ THE FULL CBAT RESEARCH REPORT

CBAK Energy Reports 1st Quarter Results

On May 10, 2024, CBAK Energy Technology (NASDAQ:CBAT) released its first quarter results which materially exceeded our published forecasts. The first quarter results included the following highlights:

Battery revenues of $44.8 million (vs our estimate of $42.8 million) up more than 50% from a year ago, principally due to the continued strong performance in the energy storage segment.

The company posted another stunning jump in its battery business gross margin to over 41% in the quarter – up from 10.9% a year ago. The 41% gross margin for the battery business is significantly higher than the industry average and we think the company is benefitting from a combination of factors that include strong customer relationships, long-term contracts that were priced when input prices were significantly higher and the drastic fall of raw material costs in the past year. While this is the company’s second strong quarter for the battery business, we don’t think that 40%+ gross margins are realistic to expect for the balance of 2024 and 2025 and we are forecasting that battery gross margins will fall back into the 27-30% over the next 24 months.

Management again mentioned a new relation with a large European battery manufacturer and while we won’t speculate as to which company it may be, we do think that when announced this relationship could be a catalyst for the stock.

The company also noted for the first time that it has held talks regarding the licensing of its manufacturing platform to other companies in new markets. Management also indicated that they continue to hold advanced due diligence discussions with potential strategic investors for its sodium-ion battery business and the Hi-Trans raw material business. We think investors would respond positively to news of outside financing coming into the business and potentially divesting the raw material business.

First Quarter 2024 Results

CBAK Energy reported first-quarter 2024 revenues of $58.8 million versus $42,4 million last year. As we have noted, since our initiation in August 2023, the company continues to see its revenue mix shift to the high-value-added energy storage market. As a result of contracts signed in 2023 (when pricing was firmer) and sharply falling input costs, the company’s gross margin in the battery business reached a staggering 41.2% in the quarter. The gross margin in the raw materials business was just 2.3% in the quarter but we think investors can almost disregard the materials business when looking at CBAK as they are becoming a profitable battery cell manufacturer.

The company provided its first guidance for the battery business alone for 2024, perhaps foreshadowing some changes to come with regards to its interest in the raw material business. The company forecasts net income of $30.5 - $34.6 million for the battery business in 2024. With a fully diluted share count of 90.1 million, this forecast implies that the battery business could earn $0.34 - $0.38/ share in the battery business in 2024. With the stock trading at less than 3 times the mid-point of this forecast it is obvious that either the market is unaware of the progress CBAK has made or investors are still taking a wait-and-see attitude toward the stock.

Our model is slightly more conservative with regard to the battery business margin assumptions but we are now projecting 2024 EPS of $0.32/share and $0.37/share in 2025. Even though we have substantially revised our estimates upward, we believe the company has further room to surprise to the upside if new contracts materialize and margins remain higher than we anticipate.

Based on comparable valuations of public battery companies and the strong growth and profitability of the battery business we are increasing our target valuation to $2.50/share or roughly 8 times our current 2024 EPS estimate of $0.32/share.

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