Here it is, I think they could have written on the public transport/personal mobility angle.

VMOTO: RESEARCH TIP - MAY 2020

Published: 28 May 2020

Sector: Manufacturing

The China based electric scooter manufacturer comes out of the Under the Radar vault after management’s successful reinvention

WHY WE LIKE IT

The China based company is in a much better position than when we first covered it in 2014, gaining new contracts from international clients at a fast rate by capitalising on its first mover advantage; it’s cash flow positive; the valuation isn’t extreme. Vmoto is growing fast and is on a forecast market cap/sales multiple of 0.8 times, well below other growth companies that trade on high single-digit multiples.

More to the point, its shares have come back from recent highs, but we think that more good news is on the horizon, having developed a strong niche in the premium electronic scooter market due to an impressive array of corporate relationships. One of the key ones is with fellow China based electric scooter vendor Super Soco; while another is white-labelling for the premium motorcycle giant Ducati.

WHAT'S NEW?

Vmoto’s shares spiked 36% on 18 May to close at 24.5 cents when it delivered a strong quarterly update to 31 March (1Q20) highlighting its strong cash position underpinned by positive cash flows and increasing international orders, mainly out of Europe. Just prior to this it raised $3.95m via a share purchase plan at 16.6 cents a share that was intended to raise $1m. The company now has net cash of just under $10m and is raring to go.

CHARGING AHEAD; A BUYING OPPORTUNITY HAS EMERGED

Subscribers who held on to Vmoto are doing well. After doing nothing for a few years, the stock has exploded from sub 10 cents to trading as high as 33 cents in mid-February.

Due to COVID-19 its stock has declined even after a bounce. The company easily raised just under $4m in an SPP (see What’s New), which is also why we think it presents a buying opportunity. How often do you get a chance to buy a cashed up company that’s going through a growth spurt, yet trades at less than 1 times forecast sales?

MIND YOUR PORTFOLIO!

There are two important lessons from our Vmoto experience which both boil down to taking a portfolio approach.

High risk companies have the potential to burst into life very quickly. Don’t sell too soon! Second, it’s prudent to hold a position of size that you can carry. This might be 1% of your portfolio. You cannot afford to leave 10% of your portfolio dead for 10 years. The opportunity cost of other ideas is too high.

Personal investors have the luxury of patience and can hold underperforming stocks for a long time. Fund managers, whose jobs are on the line if they’re not beating the market, don’t. This has always been the case, but it’s more so today, considering the structural shift of active to passive investing (index funds).

WHY WE HAVE BEEN VMOTO FANS

Back in 2014 we liked the company because it had built a 30,000sqm facility in Nanjing and had a licence to manufacture electric scooters. The factory had capacity of 300,000 units a year. Vmoto had a production agreement to manufacture bikes for a privately owned Chinese company named PowerEagle and was one of the first movers in a market that was taking off, its product being aimed at the premium end. The company was already cash flow positive.

WHAT HAPPENED?

Three years in it became obvious to us (and as it turns out management) that the PowerEagle manufacturing contract was costing Vmoto more than it was bringing in. The company was making more scooters but losing money, as the lower-margin PowerEagle vehicles chewed into the bottom line. The positive news was international, but back in 2017 Vmoto was selling less than 3,500 units, which, as we said at the time, wasn’t going to trouble Honda’s or Vespa’s top brass.

FAST FORWARD TO TODAY

Under founder/CEO Charles Chen Vmoto has thrown off the Chinese market to focus on more lucrative international sales with big results. In 2017 Vmoto forged a transformational relationship with China based Super Soco, combining forces to sell their products offshore. Vmoto then undertook a company saving capital raising of just over $2m early in 2018.

The relationship was formalised last February with a 50:50 joint venture. Vmoto is the exclusive manufacturer for both Vmoto and Soco electric scooter and motorcycle products, providing Vmoto with long-term supply security. The relationship has been central in establishing Vmoto at the premium end of international electric scooter sales.

Into the bargain Vmoto has nabbed a marketing opportunity with Volkswagen Group to brand a Vmoto Cux electric scooter under its high end Ducati label.

ATTACKING THE HIGH MARGIN BUSINESS

This has translated to higher volume at higher profit margins, which is the kind of volume Under the Radar was originally looking for. In 2018 the company sold just under 11,000 units for a little under $20m; then last year it will have sold close to 20,000 units to deliver sales of $45.7m. The company is cash flow positive and after its SPP (see What’s New) has net cash of just under $10m. More to the point, it shouldn’t need to raise more money. On our numbers the company is on track to deliver big increases on FY19’s NPAT of $1.3m due to existing distribution agreements alone.

VMOTO’S ADVANTAGES

Because it got into the electric scooter market early it has strong market recognition at the premium end and as a consequence, a relatively big “B2C” distribution platform. It sells to dealers throughout the world, but mainly in Europe. The company has focused on the high end and has teamed up with Super Soco to come out with new models consistently that are at the higher end, retailing for Euro3,500-5,800; while its Ducati labelled Cux product sells for Euros200-300 more. The company is the beneficiary of a comprehensive supply chain in China, which is the key to why Chinese products are so much cheaper to build. Tesla recently built a factory in Shanghai.

In the company’s own words last week: “FY2020 demand remains strong and international distributors have committed deposits for sales orders.” In the current climate of uncertainty, you can’t ask for more than that. Remember the lessons learned in this stock: it’s high risk because it’s a small fish in a highly competitive pond. Keep your positions at the size you can afford to lose and don’t chase the stock higher. Because markets are volatile there will likely be another opportunity to get filled.

**FY20 Forecast