Under The Radar

VMOTO China based electric scooter manufacturer The electric scooter manufacturer has hosed down the market’s FY16 profit expectations, saying it expects NPAT in the range of $1.8m-$2m, well below some forecasts in the market of $3m-$4m and around half the FY15 profit. This is partly explained by some Chinese regional authorities discouraging the use of two-wheel electric vehicles, which compete with four-wheel electric vehicles that are mostly manufactured by state-owned enterprises. There have also been some additional costs associated with the bedding down of the JV with the Shanghai headquartered PowerEagle, VMT’s largest Chinese customer. This is a difficult situation for a Western investor to analyse and a classic example of why we consider China-based businesses more risky investments and why we always have the “speculative” qualifier attached to our recommendations on the stock. The company said unit sales for 1Q16 fell 5% to 18,700. But this presumably includes 100% of the sales from the 51% owned PowerEagle JV, which didn’t exist in 1Q15. So when adjusted for the JV partner’s 49% share of sales, the fall in quarterly unit sales would have been nearer 30%. The profit effect would be somewhat offset by VMT now earning 51% of the JV’s distribution margin. VMT’S access to PowerEagle’s vast network of distributors had not yet compensated for the 49% of profit it has given up. VMT is a very small player in the massive and highly competitive Chinese electric scooter market. It is promoting its premium product in the offshore market, where it commands strong profit margins around 25%, perhaps double the margin the company earns on its basic home-market product. There are examples of fleet customers who have begun to adopt VMT’s scooters, but it is very much in the early phases. Much potential, we hope. VMT’s production facilities in Nanjing and Shanghai have capacity to manufacture around 450,000 scooters a year compared with current levels of around 90,000. Assuming gross margins are preserved, profit growth should be exponential as sales increase. The managing director Charles Chen may well expect just such an outcome. He recently bought around 3.6 million shares at 23 cents, in our view a meaningful demonstration of confidence in the business. RADAR RATING: Trading at a discount to NTA of around 30% (after adjusting for the current value of property) and less than one times sales, we still retain our recommendation that the stock is a VERY Speculative Buy, the very speculative tag reflecting the opaque nature of what is essentially a Chinese business. SPEC BUY.