Interview with China Sun Group High Tech (CSGH) Vice President and COO Mr. Fu

Monday, June 7, 2010, 3:30 PM ET -

By Zack Buckley

I was able to interview Mr. Fu from China Sun Group, he is the Vice President and COO of China Sun Group High-Tech (OTC BB:CSGH), the 2nd largest manufacturer of Cobalt based materials for Lithium-ion batteries in China.

Zack: Can you provide some background details of the company?

Mr Fu: China Sun Group through 100% owned subsidiary Dalian Xin Yang High-Tech Development Co. produces cobaltosic oxide and lithium cobalt oxide. We started to produce lithium iron phosphate and plan to expand production over the next three years. We are still focusing on the cobalt products to keep a stable revenue stream. We have large skill and advanced technology in our industry which benefits us greatly. We are one of the biggest high technology companies in China. Our high technology and capacity allowed us to occupy the domestic market in China which is focusing on cobalt products. In 2008, we started getting into the new lithium battery industry, producing the new LIP products, which is our major focus in the future, because this is the most cost effective and high technology battery in the industry, we are looking forward to building our new facilities and bringing to market lower cost products combined with superior quality. We focused on raw material production and supplying in the past, but now we are on pace to create a manufacturing chain which ranges from raw material procurement to final battery production. We expect to produce batteries in August 2010. We receive respect for our superior technology. We were just honored by the government in Liaoning as one of the companies that will benefit the clean energy industry. The local government made an investment to support the clean energy industry because they want it to have a bright future. The short term goal is to move downstream to produce lithium battery from only producing raw materials, while the 5-10 year goal is to build lithium batteries for automobiles.

Zack: What is the status of your cobalt project in Congo? Will margins be substantially helped?

Mr Fu: We purchased the prospecting and mining rights in Congo in 2008. After 2008, the Congo local government has changed policy to encourage raw material supplying in the domestic market. The transportation from Congo would take too long, as we sometimes need very quick delivery of our raw materials to supply customers’ needs. Also due to the uncertainty in the global economy, we postponed the Congo project and changed our business strategy accordingly. We can get cobalt in China, not only because it is cheaper in China, but also it saves lots of time for us because of the geographic proximity of shipping. Especially when we see the rapidly emerging requirements in the market, it is an advantage that we can get raw materials shipped to us immediately if our suppliers are in China. Due to uncertainty in the international market, our strategy adjustment is very helpful to support our good performance recently.

Zack: Where do you see the company in 5 years? 10 Years?

Mr Fu: I’m confident about our future. We are planning to build up a unique model to not only supply the raw material for the lithium batteries, but also produce our own lithium batteries, which is one of the major components of battery-powered automobiles. We will be a holistic provider of the raw materials for auto batteries as well as the finished product for automobiles and electronics.

Zack: If you could put a golden bullet in the competition, who would you kill?

Mr Fu: We don’t want to kill any competitor because we are collaborating with our competition to create superior technology. We regard competition as helpful. No competition, no improvement. We need cooperation and collaboration. In the booming market with booming technology we are starting at the same place with our competitors. I would like to develop a healthy relationship with our competitors to get to the final destination of having the best battery technology.

Zack: What are CSGH’s competitive advantages? What makes these sustainable over long periods of time?

Mr Fu: First, we have advanced technology, we are proud of the automation rate in our plants. We have built up our technology over a long time to keep competitors out and do not believe it could be easily duplicated.

Second, we are creating a multi-products model. We are not only focusing on LIP as a raw material, but also on the finished battery products.

Third, we have substantial cost advantages over our competitors which allow us to produce the same high-quality products at a lower price. They produce at lower costs than their Japanese and Korean competitors.

Zack: Can you explain your main competitors a bit more?

Mr Fu: There are competitors including the ones we have mentioned as well as other Korean and Japanese competitors. In LIP, we think we have a unique position and competitive advantages not only because of the exclusive technology patent, but also produce a lot of raw materials ourselves. Moving forward, our major clients will be not only Li battery manufacturers looking for lower cost and high quality cobalt oxide sources, but also ourselves. Another 40% of lithium iron phosphate will be used within China Sun to produce Power Li-Battery, which sells to major electronics manufacturers. This leads to another competitive advantage: lower cost.

China surpassed Korea as the second largest lithium battery provider, in 2007, now chasing Japan as the first. We believe our product quality and price will compete effectively in terms of competing with international peer companies in Japan and Korea. Our goal is to catch up with American technology and also surpass Korean and Japanese companies in production efficacy and efficiency.

Zack: Why do your customers choose you over the competition?

Mr Fu: For all those years in production of raw materials, we have uniformity in our production. Not only are we localized for our clients but we specifically cater to our clients and customers needs. Also, we put lots of efforts on quality management systems and believe they are superior to many of our competitors. Another important factor, our cost is 20% lower than those competitors. We can produce the same high quality products with lower cost.

Zack: What is going on with EPS growth? Do you believe it will resume?

Mr Fu: Our earnings per share stands at 12 cents in the first 9 months of fiscal year 2010, we were taking more aggressive steps in upgrading the production line and we are changing their production lines now. We will have revenue growth going forward. Also, compared with other battery producers, we are trading at a significant discount.

Zack: Can you fully explain your segment lines?

Mr Fu: We have 12 production lines, which produced our old and new products. For the old lines we have lithium cobalt oxide and cobaltosic oxide. Which are based on cobalt powder and we see that these can satisfy our customers focusing on high energy nano raw materials. Those products generate stable revenue and stay a sustainable profit margin. For example, cobalt products maintain at $37,500 to $39,000 per ton averagely with 20% - 22% profit margin. The other production lines are for our newly launched products and LIP. We have already upgraded 3 production lines to have full capacity to produce LIP. Now we are working on upgrading the other 3 production lines so that we can have 6 production lines for LIP. In the future, 6 production lines will focus on LIP and 6 production lines will focus on the old raw material products. We should have LIP production line on broad and run full capacity soon.

Leveraging its state-of-the-art technology, high-quality product line and scalable production capacity, the company has recently diversified into the manufacture of Lithium Iron phosphate (LIP) and plans to forward integrate to include the manufacture of power lithium ion (Li-ion) batteries.

Zack: LIP – what is the price per ton?

Mr Fu: While there is no international price, the current domestic price in China is ranging from $23810 USD to $24600. This depends on the raw material prices for lithium iron phosphate, which relies on lithium, iron ore and phosphate prices accordingly We expect to produce 160 tons in 2010, 700 tons in 2011 and 1400 tons in 2012.

Zack: What is going on with contracts for LIP?

Mr Fu: Our current clients are located in Guangdong and Zaozhuang city Shandong province. China yesterday released details of its green-car subsidy program designed to boost the nation's auto industry and cut vehicle emissions. Through the program, subsidies of up to $8,784 will be given to buyers of pure electric vehicles in the five cities chosen for the pilot program. We’ve already seen lots of potential clients shopping around or asking for future orders in southeast China.

Zack: Can you provide segment information for your products, including either annual production or price per ton or revenue per segment line. Can you provide expected results for 2011 and 2012? This will allow me to model revenue and net income for these years, which I believe will help other investors get a clearer picture of the company. I know a lot of investors are confused right now.

Mr Fu: From 2009 to 2010, the average price for Cobalt based products (Cobaltous Oxide, Cobaltosics Oxide, Lithium Cobalt Oxide) are $37,500 to $39,000 per ton. The profit margin is 20% - 22%.

For the new product – Lithium Iron Phosphate(Raw materials for Li-ion battery), the average price is $22,000 to $ 23,530 per ton, and the margin is 30% - 31%.

Zack: How much will lithium iron phosphate add to revenues in the long term? Will you phase out your other segments?

Mr Fu: We don’t give guidelines currently as we haven’t finalized upgrading all the production lines to make our full capacities now. We will keep you posted.

Zack: What Chinese businessman do you admire?

Mr Fu: Ka-sheng Li, Chairman of Hutchison Whampoa Limited (HWL) and Cheung Kong Holdings, of which hold 15% of the market cap of the Hong Kong Stock Exchange

Zack: What Chinese companies do you admire?

Mr Fu: China Creative New Development Company – Lenovo, a China-based multinational computer and high technology company.

Zack: What do you think of BYD Company (HKSE: 1211.HK)? New Energy Systems Group (OTC BB:NEWN)?

Mr Fu: I cannot speak for them. BYD is in a different territory of producing li-ion batteries and lithium-powered automobile industry now. NEWN produces and manufactures lithium battery, which is more closely to what we are doing and planning to expand in recent years. As we are moving from the raw material upstream industry to downstream consumer products, our business model will change from commodity business to consumer-oriented business, which can avoid more commodity price volatility risks.

We are the 2nd largest non-government manufacturer of Cobalt based anode materials in Asia. This industry maintains high barriers to entry include significant capital investment and government certifications. The demand in China grows 40% per year, on pace to become world’s largest producer and consumer of Li batteries.

Now, lithium iron natural resources become more important to the battery auto industry. For example, I’ve heard that BYD was eyeing the rich lithium mineral resources in Sichuan, Jinchuan, where is the home to one of the richest lithium deposits in the world with estimated reserves of 50 million tons. We are working on our side to find better supply and high quality lithium materials and we are confident as we’ve been in the raw material segment for years more than any other peer companies.

Disclosure: Long CSGH at time of this interview

Profile

GeoTeam Contributor Zack Buckley is CEO of Uncoveringalpha.com and a research analyst at Geoinvesting.com. He developed his investing methodology by synthesizing the ideas from the best investors of all time, based on their track record. This led him to closely follow Warren Buffett, Peter Lynch, Seth Klarman and Benjamin Graham. Using a value approach, he pursued the most undervalued companies he could find, which led primarily to companies in China. Buckley will be spending three months this year in China visiting companies that are exciting investment opportunities.

****Follow him on his blog, Uncoveringalpha.com, as he travels across China touring factories and interviewing management.**