GP Batteries International

[greengiraffe]

I have been an odd lot investor in both GPI and GPB and been following their entire group since mid 90s. I think HK management running Chinese operations can be well trusted. However, I think the generally stable operating business profile may have been affected by raw material fluctuations, rising labour costs and perhaps a shortening of product life cycle due to the derived demand nature of their products.

Thinly traded HK parent Gold Peak Ind owns 83% of GP Ind that in turns owns 53.5% of GPB. GPI has been sustaining dividends above net earnings since 2010 and that is mainly to upstream to HK parent. With GPI now controlling GPB as a subsidiary, it make sense for GPB to upstream as much cash to GPI for upstreaming to Gold Peak Ind.

I personally think that GPB has seen the worst of fortunes in the last few years:

i) soaring raw material prices on the onset of GFC due to shifted speculative fund flows into commodities;

ii) if I remember correctly, there was some sort of environmental issues with GPB plant in China

iii) labour issues and the current rising labour costs affecting most Chinese based operations.

Raw material prices have since stablised and with Chinese economy off the boils, this should work in GPB favour.

Environmental issues should be behind them while automation should help to mitigate rising labour costs.

With the ill fated electric vehicle project totally written off, GPB should easily turn around without the repeated one-offs.

However, forward drivers remain quite uncertain as the global battery market is a fairly stable one.

There is no doubt that GPI will continue to accumulate GPB as long as they deemed it accretive. In fact, as long as GPI buys below GPB's book value, I think GPI will accumulate non cash negative goodwill. Since GPI already controls a majority stake in GPB, it make sense to keep its open market operations as it is investing a business that it already own (but not fully) at below "replacement costs" as indicated by Mr Market.

I am only vested GPB today, above GPI's open market purchase today. However, I think there should be meaningful upside to GPB over the next 18 months in view of the clearing of decks that led to a rights issue recently.

For an established and sizable operator in the battery manufacturing space, one can never rule out the possibility of private equity buyout as well at a price that is acceptable to GPI.

Vested
GG