Vmoto Gets Motoring

By James Dunn | More Articles by James Dunn

Vmoto is in a sweet spot supplying a growing Chinese and South-East Asian market, driven by both an expanding middle class and government policy on cleaner-emission vehicles, and a growing international market for electric vehicles.

Scooter maker Vmoto Limited (VMT) has been a frustrating stock for long-term holders, but turned the corner with a maiden profit in 2013, and is starting to kick some goals in the global scooter and electric motorcycle market.

Not many Australian investors would even know that the Australian Securities Exchange (ASX) hosts a scooter-maker. Vmoto was founded in Western Australia in 2002 by Patrick Davin – currently the company’s head of strategic business development – but the company has done virtually everything offshore, by necessity.

The high-tech electric scooters are built at Vmoto’s plant in Nanjing, China. The company has two brands: the original Vmoto brand aimed at Asian markets, while the E-Max brand targets Western markets. Initially the major focus in on the Chinese market, which is the largest domestic electric scooter market in the world.

Vmoto also sells to customers on an original equipment manufacturer (OEM) basis. Its main OEM contract is with Shanghai-based PowerEagle International Company Limited: the initial three-year OEM agreement with PowerEagle expires at the end of 2015, but Vmoto has begun preliminary discussions to enter into a new agreement with PowerEagle from 2016, including making PowerEagle’s two-wheel electric vehicle models post 2015 – an agreement is expected in the third quarter of 2015.

Vmoto’s other OEM agreement is with German electric scooter company E-Tropolis of Germany, for which VMT makes a minimum of 15,000 high-end electric scooters for sale in Europe – but this agreement expires in 2015.

In 2006 Vmoto was backdoor-listed on the ASX, through the shell of Optima Corporation. In 2007, Vmoto bought Shanghai-based Freedomotor, an international scooter and motorcycle trading and distribution company, to fast-track global expansion. In 2008 Vmoto began building its manufacturing facilities in Nanjing, China. The same year it bought Barcelona-based CSR Motorcycles, a designer and maker of motorcycles, all-terrain vehicles and scooters, to establish a base in Europe.

By May 2009, manufacturing was under way in Nanjing. In December 2009, Vmoto acquired 60% of E-Max, a German scooter maker and distributor, and set up a joint venture, of which it took full control the following year. In 2010 the joint venture signed a $5 million contract to supply the Spanish postal service with electric scooters.

In 2011, however, things started to slip. Vmoto was plagued by quality control and manufacturing issues, and board turmoil. A significant contract to deliver 30,000 125cc scooters to a Vietnamese client stalled over problems with the electronic fuel injection system, which had a severe impact on cash flow. Founder Davin – who had earlier left the company – returned as consultant.

In 2012, however, Vmoto signed its significant OEM deal with PowerEagle, to make the latter’s electric vehicle models, which set the basis for profitability. The same year, the company listed on the AIM (Alternative Investment Market) of the London Stock Exchange.

Power Eagle makes and sells more than 50 different kinds electric bicycles, scooters and motorcycles, mainly in China, but it is also a major exporter. Vmoto expects the initial three-year agreement to generate a total of $86 million in sales, from the production of about 270,000 scooters.

The PowerEagle and E-Max deals put a solid foundation under Vmoto. The company was able to break through with its first profitable financial year in 2013 (Vmoto uses the calendar year as its financial year), with a net profit of $404,460. It also opened its first Vmoto-branded retail stores, finishing the year with ten outlets.

Vmoto built on 2013’s success in 2014, Vmoto lifting revenue by 79%, to a record $45.1 million, and boosting net profit by 18%, to $476,000. The company sold 76,000 units, up 21%, and reported that underlying earnings grew faster than revenue: on an earnings per share (EPS) basis, earnings increased five-fold, to 0.26 cents a share. Vmoto reported positive operating cash flow of $666,000 – compared to operating cash outflow of $3.8 million in 2013 – and was operating cashflow-positive in all four quarters of 2014.

Net assets rose by 26% over the year, to $22.3 million. October 2014 saw the company’s best monthly profit yet, with underlying net profit for the month of $537,000. The Chinese distribution framework grew to 16 Vmoto-branded retail stores and 24 distributors.

More deals flowed, too. Vmoto bought Nanjing Haiyong, an advanced electronic technology company focused on producing controllers – a key component in electric vehicle driving systems – and signed a co-operation agreement with handlebar maker Changzhou Dusheng Electrical Equipment Company.

The Nanjing Haiyong deal made an instant revenue contribution, while the agreement with Changzhou Dusheng – which will pay a royalty to use Vmoto’s patented technology in its own handlebars – represents the first of what Vmoto hopes will be a number of deals with major spare parts manufacturers to commercialise the company’s intellectual property.

Vmoto also formed a joint venture with several experienced partners in the electric vehicle industry to enter the three and four-wheel electric vehicle market, a market the company sees as having huge growth potential. Sales from the first such vehicles produced at the Nanjing factory were expected to start from May 2015.

2015 is shaping as the really transformative year for Vmoto. In the first quarter of the year, the company sold more than 19,400 scooters, putting it on target to meet its target of at least 93,000 units in 2015. Vmoto is tipping a net profit of between $5 million–$7 million this year, mainly on the back of increasing sales outside of China. Higher-margin international volumes doubled in the March quarter, and now account for about 20% of total sales.

Over the past 18 months, Vmoto has delivered products or samples to Brazil, Mexico, Croatia, Denmark, Malaysia, Japan, Nepal, Sri Lanka, the Netherlands, Canada, Indonesia, France, Belgium, Vietnam, Iran, Taiwan, South Africa, Italy, South Korea, Thailand, Hong Kong, Greece, Ecuador and Australia. The product is now distributed in more than 30 countries.

The focus is on building international sales as well as expanding in China – Vmoto is targeting 300 outlets in China by 2017, a combination of its own retail stores and new distributors. That would help it to reach full production capacity at Nanjing within three to five years, which would equate to about 300,000 units a year. Currently, the factory is running at about 30% capacity, with three-wheel and four-wheel production having begun. An online sales platform is also planned for China.

Vmoto is in a sweet spot supplying a growing Chinese and South-East Asian market, driven by both an expanding middle class and government policy on cleaner-emission vehicles, and a growing international market for electric vehicles.

Vmoto has set some ambitious growth targets, but making continued solid progress on them could see the stock start to garner a lot more interest. Critical to this is the recent decision to make the shares more attractive to global fund managers by a one-for-ten share consolidation, which takes effect on Thursday June 4.

Before the consolidation, the shares last traded at 5 cents. At present, pending the consolidation, the shares are trading on a deferred settlement basis (ASX code VMTDA) at 51 cents, so the post-consolidation price is likely to settle somewhere in the low 50-cent range. The market capitalisation remains at about $70 million.

James Dunn

About James Dunn

James Dunn was founding editor of Shares magazine and has also written for Business Review Weekly, Personal Investor, The Age and Management Today. He was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au.

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