Life Imitates Art in Chinese Investment in A123 Systems

Someone please contact popular novelist Gary Shteyngart. Recent headlines like “Latest Chinese Target: Batteries” in the August 9 Wall Street Journal make his recent novel “Super Sad True Love Story” seem incredibly prescient, some might even say scary.

Lithium-ion battery factory, photo courtesy of gm-volt-com

Shteyngart concocted a post-apocalyptic world in which the Chinese yuan has replaced the U.S. dollar in everyday commerce. Now, in real life, Wanxiang Group Corporation, one of China’s biggest parts makers, has swooped in and acquired Waltham, MA-based A123 Systems (AONE) , a small cap maker of advanced lithium ion batteries and battery storage systems and “a company that two years ago was one of the most promising U.S. innovators in the clean fuel auto industry,” according to the Journal.

The acquisition has triggered lots of hand-wringing and, because A123 received considerable federal funding, even partisan political posturing from Republicans accusing the Obama administration of failing to “secure sensitive taxpayer funded intellectual from being transferred to a foreign adversary,” according to CNN.com (http://money.cnn.com/2012/08/09/news/companies/a123/index.htm?source=yahoo_quote). Never mind that the Chinese acquisition may actually wind up saving the Michigan factories A123 had invested in with its US taxpayer dollars, according to CNN.

We’ll stay out of the politics, but it’s a good bet that Chinese investors, and other savvy investors all over the world, can see a good bargain when it’s there for the taking. Not that long ago, A123 was trading for about $20 a share, but had recently dropped to less than $1. Unfortunately for A123, lower oil prices and a slower-than-expected demand for electric vehicles helped stall its progress, according to CNN.

So what other smallcaps might now be in the sights of Chinese investors? Who’s next to go? There’s little question that numerous solar companies have been hurt badly by competition from the Chinese and a soft economy. Or that making such things as photovoltaic panels and cells are ideally suited for the sort of mass manufacturing China is good at. Remember televisions? Just as television manufacturing migrated away from the US to Asia, battery manufacturing has pretty much done the same thing.

Here are five companies chosen randomly that are either peers of A123 in the battery/energy storage business, have been beneficiaries of government largesse, or have encountered some sort of recent trouble that has hurt their market capitalization.

Newark, NY-based Ultralife Corp. (Nasdaq: ULBI, http://www.ultralifecorporation.com/) fits in the peer in trouble category. ULBI provides products and services ranging from portable and standby power solutions to communications and electronic systems. Products include batteries (rechargeable and non-rechargeable), standby power systems and custom engineered systems. ULBI was downgraded to sell by TheStreet Ratings on Aug. 6. However, Forbes.com noted that CEO Michael Popielec has purchased $405,000 in ULBI stock in the past six months. Its market cap is now $51 million and 52-week trading range is $2.71-$5.50. ULBI closed Aug. 15 at $2.87, down 9 cents on the day.

Carrollton, TX-based Universal Power Group (AMEX: UPG, http://www.upgi.com) is a supplier and distributor of batteries and related power accessories. UPG sells, distributes and markets batteries and related power accessories under various brands and its own brands. Its market cap is $11 million and 52-week trading range is $1.26-$3.49 but trades very lightly, only about 1,400 shares a day. UPG closed Aug. 15 at $2.15, no change on the day

Warrenville, IL-based Fuel Tech Inc. (Nasdaq: FTEK, http://www.ftek.com) is a greentech company that provides various technologies for air pollution reduction and control solutions for utility and industrial customers globally. The air pollution control technology segment reduces NOX emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. On Aug. 2 TheStreet’s Stockpickr selected FTEK as a stock under $10 “ready to soar higher.” Its market cap is about $109 million and 52-week trading range is $3.47-$7.01. It closed Aug. 15 at $4.94, up 3 cents for the day.

Palo Alto, CA-based Tesla Motors (Nasdaq: TSLA, http://www.teslamotors.com) designs, manufactures and sells electric vehicles and electric vehicle components. It’s not a small cap (market cap is about $3.1 billion) but like A123 it has been the recipient of considerable federal funding (one estimate on line suggested $465 million). And like A123 it  enjoyed a high-profile start up. TSLA’s 52-week trading range is $21.50-$39.95. It closed Aug. 15 at $29.40, down 2 cents for the day

New Castle, PA-based Axion Power International * (OTCBB: AXPW.OB, http://www.axionpower.com/) manufactures high-performance, low-cost lead-carbon (PbC) batteries for a variety of markets, including mild- and micro- hybrid vehicles, which may be the commonest form of hybrid in the US within a couple of years (and already the most common in Europe). AXPW announced in May that the U.S. Department of Energy had awarded it a $150,000 grant toward the commercialization of its PbC batteries for micro hybrids. PbC batteries are as easy to manufacture as the older lead-acid batteries, but they use activated carbon instead of half the lead and are lighter, 100% recyclable, have a higher charge acceptance and faster recharging rates, all ideal for the micro-hybrid and mild hybrid markets.  AXPW has a market cap of $26 million and a 52-week trading range of $0.25-$0.84. It closed Aug. 15 at $0.30, no change on the day.

*Denotes a client of Allen & Caron Inc., publisher of this blog.

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