Lithium batteries are a hot spot for development stage public
companies. The potential for supplying billions of dollars of
battery systems to the electric vehicle market has attracted
capital to large and small battery system makers. Some of those
will go bright like an incandescent light bulb just about to
(spending money like there is no tomorrow), and then disappear from
sight. Having said that,
we expect Valence Technology to be a survivor.
Compared with its competitors, Valence Technology (
) isn't that young anymore. Valence is 21-years old, was founded in
1989 and developed the current lithium battery material in 2002.
The company develops, manufactures and sells advanced energy
storage systems utilizing phosphate-based lithium-ion technology.
The products are in commercial use by customers such as Smith
Electric Vehicles, Segway, Howard Medical Solutions, Oxygen S.p.A.,
Rubbermaid Medical Solutions, Enova Systems (
), PVI, Tennant Company (
), and Wrightbus.
The phosphate based lithium-ion batteries are claimed to have
advantages over other lithium batteries. These advantages include
higher performance, longer life, more reliability, environmental
advantages and greater safety. (We won't delve into the validity of
these claims in any detail in this article). On the negative side,
the upfront cost of these batteries is higher than the competition,
but the argument is made that longer service life can result in a
lower lifetime cost.
Valence can claim some maturity as a manufacturer. The cost of
goods sold, and the opex have been consistently coming down, and it
is conceivable that the company could break even in the next year.
It shipped to 54 customers in the last quarter, and several
customers appear to be emerging from the technology assessment
stage and moving into the volume production stage.
Valence identifies five possible markets for its products:
Motive (Hybrid and all electric vehicles including car, bus, truck,
tram and scooter); Marine (yachts); Industrial (floor cleaners,
forklifts, medical carts, wheelchairs); Military; and Stationary
(power outage and voltage stabilizing). Recently medical devices
and bus fleets have been strong for the company. The CEO mentions
going into "numerous" bus companies in Europe.
The Lithium Battery Market
The excitement in the large lithium battery market has been
centered in motive applications. This is due to the relatively high
energy density (small package, low weight) of lithium batteries.
Compact, light batteries storing a lot of energy are critical for
the range of an all-electric vehicle.
While most of the media attention has been focused on electric
cars and hybrid electric cars there are many other motive
applications such as truck fleets, bus fleets, and golf carts that
could make a large market. These vehicles need a safe battery
capable of heavy daily use, and are expected to last for many years
of use. This is a primary target for Valence.
Portable tools and consumer devices are a hot market for small
lithium batteries. Competition in this segment is more price
intensive due to the number of Chinese companies making
standardized small cylindrical batteries, plus faster product
qualification. Fortunately, this is not Valence's target.
In the center, there are medium sized consumer and commercial
applications such as portable medical carts, floor cleaners and
cordless vacuum cleaners. These are applications where Valence can
participate with the high density energy, long cycle life and safer
Although it is not out of the woods yet, we like what we see in
Valence's income statement. The company has had fairly consistent
revenue growth. From FY2007 to FY2011, the company grew from $16.6
million to $45.8 million. Even better, it has shown gradually
improving profitability. Gross profits as a percentage of sales
have improved from 2% to 20% in the last year and in the June
quarter. Management has kept R&D spending, marketing and admin
spending under control so that operating expenses have reduced from
97% of sales in FY2007; they have reduced spending to 40% of
The company is still losing money. There is a silver lining here.
The losses (at $ 3.3 million for the quarter) for the June quarter
are at a point where near-term financing requirements should be
A small number of customers are responsible for 74% of the
company's revenue. Orders from Smith Electric Vehicles have caused
revenue in the past two years to be highly variable. In the June
quarter the sales came from: Smith Electric Vehicles (36%), Segway
(18%), Rubbermaid Medical (10%) and Howard Medical (10%).
Unfortunately the company has had the largest share of its
revenue coming from one customer, Smith Electric Vehicles. As
reported by the company: "Sales to Smith accounted for 36% of our
total product sales for the three month period ended June 30, 2011,
and 28% of our total product sales for the three month period ended
June 30, 2010. Segway accounted for 18% of our total product sales
for the three month period ended June 30, 2011, and 40% of our
total product sales for the three month period ended June 30,
2010." Worse, Smith has decided to find a second source for
batteries and has awarded a contract to A123 (
After 20 years of operations, having only a handful of
significant customers is not the sign of a robust business sector.
Dependence upon one or two customers has been the downfall of many
technology companies. On the positive side, the company has
recently seen an increase in the portion of business coming from
other sectors. In the last conference call, the company mentioned
sales are coming from 54 separate customers.
Geographically, revenue is very USA and Europe centric. Of the
$14 mln sales in the quarter, $11.7 of that came from the United
States and $2.2 mln of that came from Europe.
Competition is pretty fierce in the lithium-ion space. The
company considers LG Chem, Matsushita Industrial Co., Ltd.
(Panasonic), Sony, Toshiba and SAFT, A123 Systems, Dow - Kokam,
Thundersky - Winston Battery, Altair Nanotechnologies (
) , and Ener1 (HEV) to be main competitors. We would consider
established lead-acid companies like Exide (XIDE), [[JCI]] and
Enersys (ENS) to be potential competitors, as their brand strength,
OEM relationships and large size could give them a fast start
should they choose to be aggressive in lithium batteries.
Valence's claim is that phosphate based batteries are safer and
more environmentally friendly than less stable cathode materials.
the most recent 10-K
it claims that the phosphate properties render the batteries
"almost incombustible if mishandled during changing and
discharging." It also claims several performance advantages over
lead-acid, nickel-cadmium, nickel metal hydride and oxide based
lithium batteries. Other sources have indicated that Valences'
batteries are relatively expensive, although Valence claims a lower
lifetime cost in numerous applications due to lower maintenance
costs, longer cycle life and longer service life.
Valence doesn't own the whole Lithium - phosphate segment. A
quick Google (GOOG) scan will reveal many Chinese mainland and Hong
Kong based companies selling small LiFePo4 cylindrical and
prismatic cells. These companies will be strong in segments such as
consumer products made in China, and batteries for e-bikes.
Possibly to differentiate from these small format competitors,
Valence is emphasizing larger modules such as the XP modules and RT
modules in standard BCI lead-acid battery sizes.
Today, there is no indication of potential electric car
business. However, it would seem that the "non combustible" safety
advantages should be attractive to an OEM.
Valence lists 133 US patents on its website, many related to
phosphate based formulations. It is outside our expertise and
resources to value the patents, but the quantity of patents does
point to Valence's credibility and position as a leader in
Valence states that the next phase of the strategy is to move
beyond its current in-production technology to commercialize its
(patented) Lithium Vanadium Phosphate ((LVP)) and Lithium Vanadium
Phosphate Fluoride ((LVPF)) cathode materials into large-format,
high capacity cells. The new materials are claimed to offer
improved performance with additional energy storage and higher
voltage capabilities for the motive, stationary power, consumer
appliance, telecommunication, utility and other industries.
Potential for Acquisition
Valence could also become an interesting acquisition target for
a large battery maker (like Exide or ENS or Johnson Controls)
choosing to buy some technology and patents. At current market
capitalizations, Valence is not that large a fish to swallow.
Valence has made good progress on cost control. In the four
years from FY2007 to FY2011
- Gross profits increased from 2% to 21% of revenue
- R&D spending reduced from 24% to 8% of revenue
- Opex reduced from 97% to 40% of revenue
- Net loss reduced from 134% to 28% of revenue
The company had $11.5 mln in cash at the end June 30, 2011. Net
cash used in operating activities was $2.3 mln in that quarter.
On the negative side, the company is a small player in a highly
competitive market. It is still very dependent on revenue from two
customers, and one of them is partly moving away. There will
continue to be price pressure from the cheap Chinese suppliers at
the low end of the business, and we are not sure the patents have
enough teeth to fight off imitators.
On the positive side, this company has a focus on the bottom
line that we like very much, and has been gradually broadening the
revenue percentage away from the top 2 customers. It is making some
progress in finding applications that go beyond motive power. Their
near-term financing needs look modest, and so further dilution may
Overall we rate the risk level as
Valuing the Investment
uses a proprietary method to value technology growth stocks. The
core of the technique is a projection of future revenue and net
earnings, and we discount earnings according to the risk level.
Key to our model are the revenue and net profit assumptions. Our
long-term revenue growth assumption for Valence is 25% per annum.
We further assume that the net income for a company like Valence
with a good eye for the bottom line and manufacturing in China will
Although we are bullish about Valence in the long run, we fear
the next quarter or two could be rocky. Valence isn't quite ready
to go profitable without the largest customer, Smith Vehicles. Yet
Smith has decided to second source most of its US purchases to a
competitor. The company can't say that it will get any revenue from
Smith in the current quarter, which means the next report or two
could show a big drop in revenue and bigger losses. Even though
this is anticipated,
we doubt that the market will be kind to VLNC
if or when it happens.
With our assumptions of 25% long-term revenue growth, we feel
Valence is fairly valued at $1.10-$1.25. On the other hand,
depending on how optimistic you are, just one or two large OEM
deals could give some serious upside potential to that number. We
like the odds.
With the nervous market we wil look for a significant pull-back
in price over the next couple of months, as a possible buying
I am long
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