Full Position: China Sun Group High-Tech (CSGH)

China Sun Group High-Tech
Ticker: CSGH (OTCBB)
Share Price: $1.72
Market Capitalization: $91.89 million
Cash: 12.42% of Market Capitalization
EPS: $0.16
P/E: 10.75

CSGH is the second largest producer of cobalt and lithium-ion battery component materials in China. The company owns a proprietary series of nanometer technologies that supply state-of-the-art components for advanced lithium ion batteries. Leveraging its state-of-the-art technology, high-quality product line and scalable production capacity, the Company plans to create a fully integrated supply chain from the primary manufacturing of cobalt ore to finished products, including lithium ion batteries.

Recent Developments:

- CSGH Signs LOI to Jointly Produce Finished Li-Ion Batteries for Electric Vehicles

"Two of China's leading battery producers have successfully completed testing of li-ion batteries using CSGH components. The companies are now demonstrating a prototype battery to electric vehicle manufacturers to facilitate sales of finished li-ion products. In addition, China Sun Group has 21 customers undergoing technical testing of its new li-ion product. The goal of our strategic agreement with Beijing Zhongxinlian is to accelerate the commercialization of our green, li-ion battery product to the global electric vehicle manufacturing market. With the production of finished li-ion batteries, China Sun Group looks forward to expanding its business worldwide as a complete, end-to-end battery product manufacturer."

- CSGH Forms Key Academic & Government Alliances

"China Sun Group has received 600,000 RMB or approximately $87,900 USD as a technology subsidy from the Municipal Government of Dalian. ... CSGH's li-on products, lithium cobalt oxide and cobaltosic oxide, were designated as a "Priority Choice of Government Procurement". The Dalian municipal government's financial and administrative support has been very impressive. [Subsidiary] DLX is now preparing an application for a subsidy from the State to continue to bring new energy, li-ion products to market. We believe li-ion can make cleaner, high-efficiency, low power energy sources economically viable in China. We look forward to updating our shareholders on the future progress of these government and academic efforts."

Investment Thesis:

I am adding a full position to the China Portfolio. Lithium ion batteries are primarily used in portable devices such as notebooks, MP3 players and mobile phones. But this market is set to expand significantly into electric and hybrid vehicles in the near term. China is expected to be the leading growth market for electric vehicles in the coming decade. CSGH's products seen strong government support with patents and awards such as "Priority Choice of Government Procurement" and "Key Product Promoting the High-Tech Industry". China Sun Group looks well-positioned in this market and has plenty of cash on its books.

In order to secure future growth with a stable supply of cobalt ore, the company has purchased interest in a cobalt mine in Congo and plans construction in the first half of 2010. I see this as a risky endeavour for such a relatively small company as Congo is a country of high corruption and political crisis, even war. But it shows that CSGH is willing to take all necessary steps to secure and improve its position in the high-growth li-ion market.

I am very optimistic about the battery market and especially CSGH's performance in 2010. Revenue growth of 40% should be achievable for the company and with test results for their new li-ion product coming in by Q1/2010 we could see new orders and developments that work at catalysts for the stock price. It is difficult to project an EPS number for 2010 as construction costs for the Congo mine will eat off some of the profits, but with CSGH's current cash position, financing should not be a problem. The stock price came down from a high of $2.10 after last quarter's results were basically just in line, but there is a good chance that CSGH will retest this level near term again.

My initial price target for CSGH is $2.50.