China Sun Group Analysis

China Sun Group High-Tech (CSGH)

China Sun Group released Q2/10 earnings per 10-Q SEC filing last night. Here are some key numbers:

• Revenue: $10.1m (up 32.9% year-over-year and up 8.6% sequentially)
• Net Income: $2.0m (up 11.5% year-over-year and down 2.2% sequentially)
• Gross Margin: 30.0% (down from 36.7% last year and 32.8% last quarter)
• EPS: $0.04 (up from $0.03 last year and unchanged sequentially)
• Cash: $11.66m or 11.37% of current market capitalization
• Debt: none

Key business developments:

• average sales price decreased slightly by 3%
• significant increase in the prices of raw materials
• company spent 68.79% less for sales and marketing of products

Cobalt Mine plans delayed by 2 quarters

"We plan to start the construction of a processing plant in Congo in the fourth quarter of the 2010 fiscal year. We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000."

Electric Vehicle Battery

On Oct 27, 2009 CSGH announced that "two of China's leading battery producers, Shandong Shengong KP-Power Co., Ltd. and Beijing Zhongxinlian Shuangsheng Sci-Tech Co., Ltd., have successfully completed testing of li-ion batteries using DLX 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." Currently China Sun Group's top five customers account for 83% of revenue, any news on new customer wins would be a big positive for the company. There are no news about recent developments in the technical testing of the new batteries or additional customer wins from the strategic agreement with Beijing Zhongxinlian in the 10-Q filing. CSGH is notoriously reluctant with issuing press releases or even doing conference calls so I do not expect any news until the company has anything factual to report.

Investor Relations

The company needs to greatly improve investor awareness and communication. Hiring a US-based IR firm would be a big positive as there are very many open questions that might keep the stock price depressed until clarified. Open questions that come to mind are:

• "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." How is this plan progressing so far?
• When is the company expecting results from the electric vehicle battery testing? Is everything there still on track?
• Is the trend of declining gross margins accelerating as the plain numbers would suggest?
• Why has the construction of the Congo plant been delayed?

Bottom Line

Quarterly earnings per share of about four cents as reported for the past four quarters would justify a share price in the $2-2.50 range but without significant future developments there is limited upside from those levels. Those developments are uncertain for now as the company is not communicating any progress. CSGH is cash flow positive and cash on hand seems sufficient for 2010 financing activities, including the delayed construction of the cobalt plant in the fourth quarter. Any positive news about projected business expansion, positive testing results for the new batteries, and especially new customer wins in the electic vehicles market are the biggest catalysts for higher multiples and stock price.