This week’s results from China Shoto have helped to propel its share price back towards our 153.5p recommendation price. We tipped the shares in July last year and they soon began a long, drawn-out fall to 120p, which was not helped by the company’s decision to cease its interim dividend payment in the autumn.

Admittedly, our timing could have been better. But we have always believed that China Shoto has good prospects over the medium to long term and that it would reward investors eventually.

Tuesday’s publication of the company’s 2007 results appears to confirm this. Not only did revenues for the 12 months to 31 December increase by 81 per cent to £107.5 million, with pre-tax profits growing 58.7 per cent to £7.2 million, but China Shoto’s management – as expected – recommended a final dividend of 4.5p per share.

The increase in turnover was mainly driven by back-up battery sales to the telecommunications market, which includes China’s six major telecoms operators. These increased by 99 per cent to £78 million.

But sales of China Shoto’s power-type batteries for electric bicycles also increased by 45 per cent to £29.5 million. Consequently, the company has become the largest lead acid battery producer in China.

At the end of December, net debt at the business had increased to £12.2 million (up from £2.3 million at the end of 2006), but debtor days look a lot healthier – reducing on average to 69 days from 75.

Looking ahead, the company believes that two key events will give it a ‘huge market opportunity’ this year: the introduction of ‘third generation’ mobile telecoms technology in China and the Olympic Games, which is driving demand for both mobile phones and mobile phone network use.

Investment bank Seymour Pierce is confident that growth at the business will continue to be driven this year by continued strong demand from telecoms operators investing in 3G infrastructure. Despite the increasing price of lead stifling margins, China Shoto’s house broker believes that volumes are sufficiently higher to merit an increase in its profit forecasts.

So, for this year, net profits are set to come in at £6.4 million (2007: £5.7 million), which translates to earnings per share of 26.6p (2007: 24.8p). Next year, EPS are estimated to increase to 29.9p.

China Shoto’s increase in debt is a concern, although its current net gearing of 35 per cent should be manageable.
But with the business’s shares currently trading at just 5.5 times prospective EPS for this year, we think the share price of 147.5p is far too low. Buy.

China Shoto	AIM	£21.01m	90.00p	0.00p
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Other company articles:
China Shoto			24/04/2008
China Shoto			23/04/2008
Seymour Pierce			01/04/2008
China Shoto			13/03/2008
Seymour Pierce			30/10/2007