CBAK

[David Randolph]

I made an analysis on CBAK and concluded it was a sound short opportunity. But I said I would wait for results to come out until November 15th (the limit date). I said this because the stock had bullish momentum in anticipation of earnings. But it was very weak yesterday: while other China related stocks were rising (they fizzle by the end of the session), CBAK was already down and closed down.

Results on Q2 were already lower than in Q1, both in terms of revenues and earnings. The same thing may very well happen in Q3 and the stock may tank immediately at the open, since it is so overvalued.

I recommend shorting CBAK today, 6.66% of capital as always.

Here's my initial analysis made yesterday and I leave the updated chart at the end:

«1. Introduction

elliemae requested some insight on CBAK, and as I made a few quick tests I think I found out that CBAK can be a safe and profitable SHORT opportunity. I agree with njshiva and mitchjas, the chart looks promising, but perhaps that will be short lived. Let me make a full analysis on the stock.

2. Profile

China BAK Battery, Inc. (CBAK), through its subsidiaries, engages in the manufacture, commercialization, and distribution of various standard and customized lithium ion rechargeable batteries primarily in the People's Republic of China. It primarily manufactures steel cell, aluminum cell, and cylindrical cell batteries. The company supplies rechargeable lithium ion batteries for use in various other portable electronic applications, including handset telephones, laptop computers, digital cameras, video camcorders, MP3 players, and general industrial applications. China BAK Battery also focuses on manufacturing a family of replacement lithium batteries for mobile phones. The company was founded in 2001 and is based in Shenzhen, China.

3. Technical Analysis
3.1. All History Chart



CBAK went from $1 and OTCBB to $14 and the Nasdaq without any volume. The volume just picked up on the downside. It looks like the stock was pushed to the upside to unfold a distribution of shares on the way down.

3.2. Medium Term Chart



The medium term chart shows a lateral/descending trend. Sometimes the only way you have to discern the trend is to compare the right side of the chart with the left side. In CBAK's case, the right part of the chart is lower than the left part, so the trend is bearish.

3.3. Short Term Chart



There was a short term bullish breakout yesterday. The next resistance is at $8.07, then $8.50 and then $9.30. The move yesterday was a move of sympathy, because everything China related is due to report 3rd quarter earnings and they're all moving up in anticipation of strong earnings.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The share count is growing (not YoY, but QoQ), as expected, and it will grow more in the future, as you can read here: CORRECT: China BAK Battery files $87 mln stock offering. I know that a big part of this comes from existing outstanding shares, but as I read the prospectus, there are about 5 million new shares to count here. So the market cap now stands at about 54 million * $7.38 = $398 M.

4.2. Liquidity



The graph above shows the working capital figures for the last 5 quarters. The problem is that this graph is completely misleading, because a substantial part of the Total Current Assets is made up of receivables and inventories. Let me show you a graph with the working capital less receivables and inventories:



Without these two items, that really don't represent cash, CBAK has a negative ($115 M) working capital position. They have just $6 M in cash and $121 M in short term debt. How are they going to pay the debt? Issuing and selling shares all the way down to $1, I guess !

5. General Overview

There's no use in going through Revenues and Profits because it is apparent that those numbers have flaws. Read this excerpt from one of the latest SEC forms:

«We have had material weaknesses in internal control over financial reporting, which relate primarily to the disclosure and presentation of financial information under U.S. GAAP. We have restated our financial statements three times. We cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.»

Another red flag came from the recent change in the accounting firm:

«As reported in the current report on Form 8-K filed with the SEC on August 4, 2006, we changed our independent registered public accounting firm from Schwartz Levitsky Feldman LLP to KPMG.»

The problem with CBAK is that their revenue numbers aren't for real. They are producing products for inventory or they ship them without receiving any money. This is why they have such high number of receivables and inventories (in fact, much higher than their revenues).

This company isn't worth $398 M, in fact, I don't think it is worth 1/10 of that. Even their facility isn't legal:

«We do not hold land use right for our BAK Industrial Park where our facilities are located, nor did we obtain the required construction and zoning permits for our manufacturing facilities and other related facilities situated on the land.»

If you read further on you'll see they can lose their facility in a blink of an eye if the Shenzhen municipal government decides so. Yet, they show $90 M in Net Fixed Assets on the balance sheet.»

[David Randolph]

CBAK was lower all session, but reacted positively to the short term ascending trendline on the chart, on weak volume. I was pleased to see that it didn't close above $7.25, I think it is an important level on a short term time frame.

I'm all about protecting capital, so I say that if the stock is set to close at a new high above $7.49, I'll buy to cover. A close below the ascending trendline, tomorrow at $7.16, would be the market saying "you're right on your assessment David, now wait for me to tell you how much is enough".

[David Randolph]

I'm all about protecting capital, so I say that if the stock is set to close at a new high above $7.49, I'll buy to cover. A close below the ascending trendline, tomorrow at $7.16, would be the market saying "you're right on your assessment David, now wait for me to tell you how much is enough".

CBAK closed below $7.16, so, at least for now, I'm right. Now I need to continue to be right by sitting tight and do nothing. But I'll leave my protective stop, just in case: «If CBAK is set to close above $7.49 I'll buy to cover the stock near the end of the session».

[David Randolph]

CBAK saved the day today, with a 1.7% decline. The stock clearly broke down below the ascending trendline and the next support area comes only at $5.71.

We'll probably get results next week. Two things can happen: Results are bad and the stock sinks immediately to the $5.70 area. Or results are perceived to be good, there's an higher open possibly wiping out all of my profits or more, but it all ends with a black candle and that's the high of the move.

This is my expectation. I will continue to buy to cover if the stock is set to close above $7.49, as protection.

[David Randolph]

There isn't any story on CBAK today. Earnings are coming out tomorrow or Wednesday. I'll be short through the earnings and will only buy to cover if the stock is set to close above $7.49, which is the latest local high.

I'm expecting to cover this short position with no less than 30% profit, we'll see.

[422fwhp]

update?

I sold more short today @ $7.22

[David Randolph]

update?

I sold more short today @ $7.22

I think you did well. Results are probably coming out after the close (or tomorrow before the open), so people are short covering this or buying ahead of results. I think they will be disappointed.

I'll continue holding CBAK short until I cover with a nice profit or buy to cover because the stock is set to close above $7.49.

[njshiva]

Great analysis David!!. Applause and good luck!!

[David Randolph]

Great analysis David!!. Applause and good luck!!

Thanks njshiva 

After all CBAK has until December the 15th to release earnings, because this is the annual report (10-K), not the quarterly report (10-Q). I think the recent "rally" on low volume was partly due to people buying to cover afraid of strong earnings, since that has been the story with most Chinese companies this quarter.

If I'm right on this the stock should fall tomorrow, say, at least 2%.

On a technical basis, CBAK made a retest to a broken short term ascending trendline. The candlestick left on the chart was also bearish.

I'll just keep the trading plan of holding CBAK short for as long as it isn't set to close above $7.49 (or until I can cover with a 20% plus profit).

[422fwhp]

fake out?

[David Randolph]

fake out?

Yeah, probably, the plan is to buy to cover if the stock is set to close above $7.49. I'll wait for 3:30 PM or so to see if indeed it will close above $7.49.

This bull market is lifting all boats, good and bad.

[raspi]

Well, market certainly does not lift two boats I have been waiting for BRR and TBYH :-). However concerning CBAK, I will try to stick with it and I just shorted some more at 7.92... Todays run up is weird there has been lots of stock on the ask and still it continues to go up. I hope it's just anticipation before dissapointing results. 

[422fwhp]

Ditto on shorting more...$7.93 

Will close very near the high of the day?  Hrm...broke the upper bollinger band, too...hope it's a fake.

[David Randolph]

Ditto on shorting more...$7.93 

Will close very near the high of the day? Hrm...broke the upper bollinger band, too...hope it's a fake.

I'm sorry 422fwhp, but when you wrote "fake out?" I thought you meant "should I get out?", not "is this a false breakout?".

Well, market certainly does not lift two boats I have been waiting for BRR and TBYH :-). However concerning CBAK, I will try to stick with it and I just shorted some more at 7.92... Todays run up is weird there has been lots of stock on the ask and still it continues to go up. I hope it's just anticipation before disappointing results.

Hello rspisek, according to plan, I bought to cover around 3:30 PM, since it was obvious it was going to close above $7.49. Then I went for a drive with my wife and I was talking how a trader is best served when he combines fundamental and technical analysis (she's got a lot of patience for this, I hope it doesn't run out  )

Why?

Because we need fundamental analysis to know what to do and why we do it, and then we need technical analysis to show if we're right or wrong. Because, fundamentals can also change drastically.

For example, I believe, from my fundamental analysis, that CBAK is very overvalued, cooks its books and all. But, I don't know the future. Who knows if they're not developing a super business model, a new technological breakthrough or getting an extra large order? Or, who knows if we don't get a big speculative bubble on China related stocks, nevermind the fundamentals? Almost nobody knows, but usually the first to show what's going on, is the stock price.

I made a promise to myself not to play around with the market's will. I reduced my ego to a minimum, in a way that I don't need to be right to be more of a person.

Anyway, CBAK has resistances just above today's close, I hope you guys get away with this position, but my advice is to cover your shorts, because you already averaged a losing position, and that's a thing you should never do.

[422fwhp]

currently $7.21