Tianneng Power trades at only 1/3 the value of its listed subsidiary Tianneng Battery! (8 Mar 2021)

Dear all

Tianneng Power (00819.HK) (“TP”) caught my attention recently. It has slumped 40.5% from an intraday high of HKD22.55 on 13 Jan 2021 to close HKD13.42 on 8 Mar 2021. At HKD13.42, it trades at only 1/3 the value of its listed subsidiary Tianneng Battery! Besides this sharp plunge and significant valuation gap, what else does TP have to catch my attention? Read on for more.

 

First up, a description of TP

Quoting from its 1HFY20 results, TP was founded in 1986 and was listed Main Board of The Stock Exchange of Hong Kong Limited as the “First China Company of Power Battery” in 2007.

After more than 30 years of development, it has become a large high-tech energy group focusing on the manufacturing and provision of services of environmentally friendly power batteries for electric vehicles, while offering integrated power storage ancillary services, and integrating the R&D, production and sale of lithium batteries for new energy vehicles, start-stop batteries for vehicles and wind power and solar power storage batteries; the recycling and cyclic utilization of waste batteries; the construction of smart micro-grids in cities; as well as the building of green and smart industrial parks. In July 2020, Tianneng Power won the awards of “Best Provider of Systems Integration Solutions” and “Best Demonstration Project for Energy Storage” at the 7th Global Solar+Energy Storage Conference & Expo (2020).

Clients can refer to TP’s website HERE for more information.

 

Interesting aspects of TP

A) In the right industry with extremely bright prospects

According to UBS, they cited battery cell supplies may need to rise 70% more than forecast over the next ten years in order for electric vehicle penetration to reach 20% in 2025 and 50% in 2030. UBS cited battery cell supplies to see “regional tightness this year and global shortages by 2025”. Against the backdrop of rising electric vehicle penetration, TP should see good demand for its products.

Readers can refer to TP’s 1HFY20 interim report, where management described more about their business and prospects under the “Management Discussion and Analysis” portion (click HERE).

B) Good accolades with government support 

Last year, TP gained nine places to rank 246th on Fortune China 500. This was also the eighth consecutive year where TP made the Fortune China 500.

In addition, based on its 1HFY20 results, management cited that TP has obtained strong government support at all levels. A case in point is the government grants which TP obtained last year.

C) Especially cheap valuations if we compare against Tianneng Battery

Tianneng Battery’s (688819.SS) market capitalisation is around CNY43.3b. TP’s 86.53% interest in Tianneng Battery is already valued at HKD44.2b as compared to TP’s own market capitalisation of HKD15.1b. Such divergence in valuation is likely to narrow over time as can be seen from Wilmar / YKA.

Furthermore, it is noteworthy that based on 1HFY20 results, management cited Tianneng Battery’s brand equity value to be around CNY76.5b assessed by China-Asia Economic Development Association and Asia Brand Network. Tianneng Battery once again ranks first in the battery industry. A further rise in Tianneng Battery’s market capitalisation is likely to bode well for TP.

Moreover, TP also trades below its long-term valuations. Specifically, it trades at 6.4x FY20F PE, lower than its 10-year average PE of around 8.5x.

D) Strong results – likely out on or around end Mar 2021

TP has given a profit alert in Dec 2020 that its FY20F net profit should be >=40% higher than FY19 net profit of RMB1.7b. It is noteworthy that Tianneng Battery’s FY20F unaudited results showed a 46% growth in net profit and TP’s share of Tianneng Battery net profit is already HKD2.28b. Based on Tianneng Battery listing document (highlighted by CIMB report), Tianneng Battery typically comprises of 94% of TP group earnings. In other words, TP’s FY20F net profit may even reach RMB 2.4b!

E) Starting to garner attention from analyst and the investment community

Based on Figure 1 below, CGS-CIMB published a report on 11 Jan 2021 with a buy target HKD27.56. In the report, CIMB likes TP due to its solid earnings growth, backed by improving gross profit margins and operational efficiency and attractive valuation.

Furthermore, The Edge in its 22 Feb writeup, lists Tianneng Power as one of its top 10 stocks for 2021. It likes TP as TP is in the “right industry, manufacturing the right products, for the right geographical segment”. If TP can continue to deliver on its results, it may be able to garner more attention from the investment community.

Figure 1: CGS-CIMB (latest broker) has a buy call on TP; target HKD27.56

Analyst 8 Mar 21

Source: Bloomberg 8 Mar 21

 

Risks

As with almost all investments, they do carry risks. I have listed some noteworthy risks but do note that it is not an exhaustive list of risks.

A) Limited information available

Besides having no access to TP’s management, I have limited access to updated analyst reports and articles. As of now, there seems to be only one broker (i.e. CGS-CIMB) actively covering TP. This is a challenge that I face in researching on this company

B) Limited analyst coverage

Although TP has been listed on Main Board of The Stock Exchange of Hong Kong Limited for more than 10 years, given the scant analyst coverage, it is likely that investors and fund managers are still not familiar with TP’s business and prospects. As a result, it may take some time for Mr Market to get to know TP and for TP to re-rate accordingly.

C) Share price is extremely volatile

TP’s average daily range is around HKD0.91 which translates to approximately 6.8% of its last closing price HKD13.42. In other words, TP can easily swing +6.8% or -6.8% from its previous day close on a normal day without any particular news. Thus, this is a volatile stock and may not be suitable for everybody.

D) A selloff in Nasdaq is likely to be a dampener to TP’s share price

If Nasdaq continues to sell off, its likely to be a dampener to sentiment and pull down the market and technology related stocks. As TP may be linked to be a proxy to the EV segment, it may also get pulled down, in terms of share price.

E) A slump in Tianneng Battery’s share price may have adverse impact on TP’s share price

As per highlighted above, one of the attractive points on TP is that it trades at only 1/3 the value of its listed subsidiary Tianneng Battery. Naturally, a slump in Tianneng Battery’s share price will narrow the valuation gap, causing TP to be less attractive on a relative basis.

F) Chart is weak but unlikely to morph into a massive sell off

Amid the recent sell off, TP closed at more than a 3 month low at HKD13.42. Although it seems to have broken a key support region HKD13.88 – 14.26 with weak indicators, the low ADX at 13.0 seems to indicate that the sell off is likely to be range bound and not a start of a sharp plunge.

Near term supports: HKD13.40 / 13.00 / 12.70 / 12.50

Near term resistances: HKD14.00 / 14.26 – 14.36 / 14.56 / 15.00 – 15.02 

Chart 1: Chart seems weak but unlikely to morph into a full fledge sell off

Tianneng chart as of 8 Mar 21

Source: InvestingNote 8 Mar 21 

 

Conclusion

Readers should be cognisant of the pros and cons in owning TP’s shares. Personally, what attracts me is its its industry, earnings prospects and attractive valuations especially when we compare it against Tianneng Battery. Nevertheless, readers are reminded of some of the potential risks (see above) which you may face, in investing in TP. Clients / readers are encouraged to visit TP’s website HERE and do your own due diligence. Investments carry risk and its best to be familiar and comfortable in what you invest in.

P.S: I am vested and have informed clients to start taking a look into TP yesterday.

 

Disclaimer

Please refer to the disclaimer HERE

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