Didn't mean to 'dis' Zeev.
I've followed his posts on WFR for a long time, and recently bought some of that stock in the 4s for my wife's account. He usually does a thorough research job, and I think its great that he seems to be interested in Valence recently. He could add a lot to the board.
As for the variable conversion financing, a lot of posters are concerned about 'death spiral' shorting and selling if Valence misses the contract milestone. This would involve a lot of selling, probably millions of shares. If Castle Creek decides to hedge their position now and lock in a nice but modest profit, it only entails 1.24M shares, less than 5% of the 25M+ outstanding after the preferred conversion.
But Valence runs out of cash by the end of the year anyway, if they don't get a customer interested in their product. So the key questions have always been:
1. Is the Valence battery competitive in terms of performance and price?
2. Can Valence produce this battery in mass volumes?
3. Where is the competition?
4. What is the size of the market, and how fast will Valence penetrate this market?
As of this conference call, let me give you my 'short' answers to these questions:
1. Is the Valence battery competitive in terms of performance and price?
Lev said he was pleased with the quality of batteries coming off the line. The specs released so far on Valence's battery cells, show competitive performance. Also Lev told us in the August conference call, that Valence has a battery in development that will obsolete their current cells in a year or so.
The pricing of $2.50 per watt-hour for laptop units that Lev discussed is higher than the $1.65 we've been using on the thread since last spring, and is higher than the $2.00 that some competitors have mentioned. We've always thought the price we were using was conservative, and its turning out that way. To be really competitive, these portable computer batteries need to hold 30-40 Wh and up. The $2.50 per watt-hour is apparently close to the manufacturer's pricing on existing prismatic Li-ion cells, although the prices on these are expected to drop significantly as volumes ramp.
Pricing on the smaller cellphone batteries runs about $4 per Wh for the smaller 3-5 Wh units.
2. Can Valence produce this battery in mass volumes?
This has always been the bugaboo. But now that Lev has stopped just short of saying that the Mallusk plant is in full production, and has scheduled the analyst visits for December 3rd, I'm convinced the plant is in production mode, at least for the larger portable computer batteries. The small battery line (cellphones) will hopefully be shipped to Mallusk this month, and the company implies that the line will be operational several weeks later. I wouldn't hold my breath on this, since this line has been delayed and delayed.
3. Where is the competition?
There are a number of competitors, but the two closest to production are Ultralife and Moli. Ultralife is apparently now able to produce 3 Wh cellphone batteries, but I don't believe they have the capability to produce a competitive laptop unit at this time. Moli is apparently close to producing a laptop unit, but there isn't much information on this product.
4. What is the size of the market, and how fast will Valence penetrate this market?
Portable computer sales should hit 14-15M units world-wide in 1999. In addition, some users will buy spare batteries, and eventually there will be a market for replacement batteries. Portable computer sales are growing about 20-25% per year, and could grow even faster as the pricing on the computers drop and the law of supply and demand comes into play. The biggest cost of the notebook computers is the display screen, and these screens are dropping in price rapidly. Computer makers continue to cry out for more power storage, as they want to adopt faster microprocessors and easier to read screens, such as the TFT screens which eat more power.
Lev said that Valence will breakeven on a production rate of 1800 batteries per day, which is about 600,000 units a year. This is less than 4% of the market. Valence also can apparently produce this quantity from one shift on their first line. Also these batteries are almost certainly less expensive to produce than prismatic Li-ion, if we ignore sunk initial development costs.
Conclusions:
The most critical issue for investors in Valence is whether customers are interested in purchasing their batteries, and will be entering into purchase contracts within the next 6-10 weeks. I consider it almost certain that this will happen. If Valence is producing good quality batteries, then what will hold them back from getting a contract?
This is probably what motivated the recent massive insider buying, and is why the former CEO and former key technical manager still hold onto the bulk of their shares almost a year after they left the company. Its also probably why someone such as the MCI chairman has decided to join the board.
The variable conversion terms are a relatively minor issue compared to these issues. If they do get a contract, then the earliest we will have variable conversion is next August. I think this is the high probability case.
My analysis and opinion, of course.
Welcome to the thread guys. Hope you become Valence investors.
Paul |
