Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

China Shoto comes in with another positive announcement-but how is the cash management going?

China Shoto, the Chinese producer of industrial batteries and power supply systems, announced that due to increased demand for its power type VRLA batteries, which are used for powering electric bicycles, it has decided to expand its manufacturing facility at its wholly owned subsidiary Jiangsu Best Power Supply Co.

The current manufacturing facility will be expanded by some 15,768 square metres and when construction is completed in June 2007 it will then total 43,768 square metres-that’s a vast area.

Commercial production utilising the newly built facility is expected to commence in September 2007 (the usual quick efficient Chinese turnaround) and this extension will then increase the current production levels of 18,000 units per day to 24,000.

The cost of expanding the manufacturing facility will be c£1.14 million and this will be met from existing resources.

China Shoto expects the electric bicycle market in China to continue to grow.
According to the latest statistics from the Jiangsu Bicycle Association, the production volume of the electric bicycle manufacturers in 2006 increased by more than 78% compared to that of 2005. The Group believes that this growing demand is generated both by the need for cheap and efficient transportation and the desire to switch to greener alternatives. I’m not exactly sure how much greener batteries ultimately are!

I have been impressed with China Shoto’s efforts. However, as we have seen with other Chinese companies the risks have nothing to do with demand or output but quite a lot to do with working capital management. There is no point sending out loads of batteries if you never get paid for them!

A quick glance at China Shoto’s interim numbers illustrates things perfectly. There’s no problem with turnover growth (+141%) or profit (+25%), it’s just there isn’t much actual cash being generated at the moment, although, to a certain extent that would be expected from this sort of high growth business.

Accounts receivable at 30th June 2006 were £20m and turnover for the period of 6 months £28m, resulting in debtor days of over 4 months! Operating profit was£2.9m and operating cash was a negative £3m.

There was a lot activity in the period including the consolidation of a former ‘associate’ company which might skew things somewhat but it’s still quite a scary picture for a ‘normal’ business. You just have to remember that this is China!

Full year results are expected to be announced in the last week of April and according to the pre close statement made on 1st March will be in line with market expectations. They are sure to prove interesting reading which is precisely what investing in China is all about-I can't wait!


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