Following on from its AGM statement on 22nd June, China Shoto (LON:CHNS) , the leading Chinese battery producer and the largest supplier of back-up batteries to China's telecommunication operators updated the market today with an announcement with the somewhat gloomy title of 'Factory Closure Trading Update'. We warned previously after the AGM statement (Commentary 22nd June 2010) that things weren't looking too good and it appears they remain tough. The factory closure itself relating to a business in which CHNS only has a 59% interest and which accounts for approximately 3% of the Group's total production capacity doesn't look that significant. However, it remains a 'closure' of a business that should be going through expansion, rather than the contraction that is now clearly the case.
More importantly, since the AGM statement trading conditions have unsurprisingly remained challenging and CHNS acknowledges that the effect of lower levels of investment in infrastructure by China’s major telecos has been felt across the battery manufacturing industry. The results for the 6 months ended 30th June will indicate a decline in revenue and profitability of approx 11% and 12% respectively, which actually appears to be an improvement relative to the 15% fall over the first 5 months stated previously. In its defence CHNS has experienced meteoric growth since coming to AIM in Dec 2005. The AIM Admission doc indicated sales for the 6 months ending 30th June 2005 of £11.8m and pre-tax profit of £1.8m. For the year ending Dec 2009 the Group generated revenue of £213m with resulting pretax profit of £25m.The greater worry is that CHNS is now having to hunt out new markets for its products, notably electric bicycles, a market that was the original focus of attention when it first came to AIM but which was sidelined in favour of the rapidly growing telco market. China Shoto’s problems offer another indication of slowing growth in China and the Group will now enter new markets at a time of greater competition and therefore face even greater pricing pressure with a large factory that needs filling.The house broker’s estimates still suggest that much of the bad news is already in the price, however, it’s surely questionable that the investor is looking at China based stories where the talk is of revenue declines and difficulty penetrating new markets!