New Energy Systems: Hidden Gem With Strong Foundations for Growth

As a value investor, I am always looking for companies with great fundamentals and growth potential. By running my daily screen, a long candidate has attracted my eyes.

It is New Energy Systems Group (Amex: NEWN). NEWN is a leading provider of lithium-ion batteries for portable electronic devices in China with headquarters in Shenzhen, Guangdong Province, which is China's first—and arguably one of the most successful—Special Economic Zones. This company has recently been uplisted to Amex from OTCBB and trades in the range of $6-7.

In recent years, the global output of lithium-ion batteries has soared more than 50% annually and the demand is expected to maintain its upward momentum till 2018. At present, the global supply of Li-ion batteries is monopolized by three giants in Asia, i.e. China, Japan and South Korea, and all three have a total market share surpassing 95%.

The first use of lithium batteries was in laptops, but now they are widely used in cell phones, video machines, digital cameras, MP3 players, hybrid cars and other electronic products. The batteries are becoming more environment-friendly with a longer life, smaller size and lighter weight. Chinese Li-ion battery manufacturers are not only seizing market share for Li-ion batteries for portable products like 3G mobiles and laptops from South Korea and Japanese competitors, but also are actively developing the Li-ion battery market for electric cars and E-bicycles.

In China, the fastest-growing auto market in the world, the development of Li-ion batteries has become a core part of the development of hybrid cars. The Chinese government has recently handed out policy incentives to encourage more electric cars on the road and the demand for Li-ion batteries will increase. Investments into companies in the battery business will reward investors generously. In fact, this is already reflected in the Shanghai A-share market. Most Chinese battery companies listed in the A-share market have advanced more than 20% since August 1, 2010, with an incredible 100% net income increase in the first six months of 2010.

Products from NEWN now support iPhones, iPads (AAPL), Blackberrys (RIMM) and all major-brand cell phones, laptops, digital cameras, MP3s, etc. Currently, NEWN only operates at around 50% of manufacturing capacity and has begun to expand internationally. On August 26th, 2010, NEWN announced its plan to launch MeePower™, a new brand of advanced battery backup systems expected to be available to distributors in the U.S. beginning in the fall of 2010. MeePower generates 4–7 times more power than an original OEM battery’s capacity and can recharge the OEM battery more quickly and last longer.

In the past, the company only dealt in the low-margin battery shell & cap and battery-distribution businesses. But acquisitions in 2009 transformed NEWN into a rapidly-growing, high-margin, integrated manufacturer with an established brand name.

The first acquisition was of Anytone, a manufacturer and seller of lithium-ion battery finished products and was acquired by NEWN with both stock shares and cash payments. The acquisition not only enhances NEWN’s ability to rapidly innovate with quick-turn capabilities, over 30 patents and deep R&D capabilities, but also broadens product offering and allows NEWN to touch end-user customers.

Another acquisition was with NewPower, a China-based manufacturer of lithium-ion batteries. NewPower has extensive manufacturing expertise and capabilities. It only operates at 50% of production capacity and can triple its production with minimal additional capital expenditures. Both acquisitions are strategically important to vertical integration and increase profitability of the existing battery distribution business with added margins by internally sourcing lithium-ion batteries.

Although the company’s cash positions are influenced by its payments for the acquisitions, NEWN still shows strong second-quarter earnings. The company’s revenue has increased 335.2% to

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Chart of the Week: China's Energy Needs

All indications are that China will see a GDP growth slowdown through the end of 2010 as the Beijing government works to take some of the heat out of property prices in the country’s key cities.

We see this short-term slowdown as a good thing in the longer term because, by acting before there’s an economy-wrecking crisis, China can position itself for a more sustainable growth pace going forward. This means a lesser reliance on exports and fixed-asset investment, and more emphasis on the domestic sector.

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How to Play the Changing Shape of Energy Consumption

by Lara Crigger

It's official: China, not the U.S., is now the world's top consumer of energy, according to a report released Monday by the International Energy Agency.

Last year, China consumed 2.252 billion tons of oil-equivalent (which is a sum-total measure of all forms of energy, including crude oil, natural gas, coal, nuclear and even "green" energy sources like wind or solar). That's about 4 percent more than the U.S., which used 2.169 billion tons.

Granted, the U.S. still consumes the most energy per capita, with the average American consuming five times more energy each year than the average Chinese. And the U.S. still uses the most oil worldwide, consuming roughly 19 million barrels per day, compared with China's 9.2 million barrels per day. But these data haven't stopped the IEA from waxing philosophical.

"The fact that China overtook the U.S. as the world's largest energy consumer symbolizes the start of a new age in the history of energy," IEA chief economist Fatih Birol told the WSJ.

Strong words, indeed. But there's more to the story than meets the eye.

Behind The Numbers

At some level, what the IEA's data truly represent is just how hard the U.S. was hit by the 2008 global recession—a recession that China escaped mostly unscathed. After all, the IEA had predicted China would eventually assume the top energy consumption spot anyway, but not until 2015 or so. The recession just sped things up.

But on a more positive note, the numbers also reflect the U.S.' increasing energy efficiency, at least compared with China. Since 2000, the U.S. has improved its energy efficiency by 2.5 percent each year, while China has only improved by 1.7 percent, according to the Financial Times.

Indeed, many analysts have argued that increasing energy efficiency has led to the peak of energy demand in the States (and developed Western nations as a whole), and usage will flatten out in the future. Obviously, more efficient energy usage means less total energy being used.

At the same time, however, you can't dismiss the Chinese growth story from these numbers. For nearly a decade, China's energy consumption has grown by double digits annually, propelled by the nation's souped-up industrial capacity. Keep in mind that just 10 years ago, China's energy consumption was only half that of the U.S.

And that expansion shows no signs of slowing, either: The IEA also predicts that over the next 15 years, China will add about 1,000 gigawatts of electrical generation capacity—or the equivalent of the entire current U.S. capacity.

The end result of this growth is that China's particular energy demands have begun to redefine the way energy is used worldwide, from the kinds of cars that get made to how many solar panels or wind turbines are constructed.

It also means that global energy consumption will continue to stem from inefficient sources, at least for the time being. China's swelling energy usage isn't exactly efficient: The country may be the world leader in wind, solar and hydropower investment, but it still gets most of its electricity from coal. In 2007, China surpassed the U.S. as the world's top emitter of greenhouse gases.

Disputes

Of course, Chinese authorities—who have become increasingly touchy about claims that the country is swinging global energy prices or contributing to global pollution—have already disputed the IEA's data.

On Tuesday, the Chinese Cabinet's National Energy Administration released a report claiming that the IEA data was "unreliable," adding that the IEA still "lacked understanding about China's relentless efforts to cut energy use and emissions, notably the country's aggressive expansion of new energy development."

Instead, the Chinese NEA said the country consumed just 2.132 billion tons of oil equivalent last year, or 2 percent less than the IEA's figure for the U.S. (Interestingly, though, according to their statistics, China was the world's largest energy producer.)

So who is right?

The IEA claims they hadn't changed their sourcing or methodology to calculate the 2009 statistics, but at the same time, the Chinese government isn't exactly known for its data transparency. As recently as this month's oil market report, the IEA lamented the quality and coverage of Chinese data regarding refining activity and crude oil stockpiles. And back in its December 2009 report, the IEA wrote that "Chinese apparent demand data feature some odd trends. The most glaring is the seeming mismatch between subdued gasoline demand and surging car sales."

Playing The Chinese Trend

Regardless, the march toward increasing Chinese dominance in the global energy scene seems set to continue, and for investors looking to hone in on that trend, there are two main options available at present.

The Global X China Energy ETF (NYSE Arca: CHIE) is perhaps the purer play on the space; it tracks energy companies that conduct the bulk of their business or are domiciled in China. It's dominated by big names like oil giants CNOOC (CEO, 10.52 percent) and PetroChina (PTR, 9.89 percent); Sinopec (SHI), the nation's largest oil refiner (10.39 percent); China Shenhua Energy Co (CUAEF.PK)., the world's top coal producer (9.79 percent); and Kunlun Energy Co., a Chinese oil and natural gas E&P firm (5.32 percent).

Although Russia dominates the Emerging Global Shares DJ Emerging Market Energy Titans ETF (NYSE Arca: EEO) at 34.62 percent of assets, China still comprises a substantial portion (14.47 percent).

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Why You Should Pay Attention to the Chinese Energy Policy

Back in March 2009, Wall St. hit bottom and the world markets entered one year long rally. The fact is that the Shanghai stock market index bottomed earlier in December 2008 (see plot below). Back then, China started the biggest stimulus package and pushed its GDP growth over 10% in the following year. Most countries worldwide benefited from China's move.



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China Surpassing U.S. as Largest Energy Consumer Is the Story of the Past Decade

years, has now been surpassed as the world’s No. 1 energy consumer. IEA Paris, following the BP Statistical Review in June, has decided to call this race in favor of China. However, this is really not a story of today. Rather, it’s a story of the past decade. Only the confluence of several powerful forces could have delivered China to its current position. The press should have been paying closer attention. Moreover, the real story here is in China’s growth in coal consumption–the energy source China drew upon to first match, and then surpass, the United States.

Let’s take a look first at BP’s data assessment for 2009 energy use, vs. IEA Paris. Our unit of account here is the mtoe–million tons oil equivalent. This is a unit of energy, not volume, and measures BTU. Also, a note: IEA Paris apparently is including Hong Kong in their data so I have added Hong Kong also to mainland China from the BP Statistical Review (which tracks them separately). For 2009, BP has China edging the USA by nearly 19 mtoe, and IEA Paris has China exceeding the USA by a more substantial 82 mtoe.

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