China Shoto plc, a leading Chinese producer of industrial batteries and power supply systems, today announces its intention to seek admission of its shares to trading on the AIM Market (¡°AIM¡±) of the London Stock Exchange.  Dealings are expected to commence on AIM in November 2005.

 

China Shoto is one of China¡¯s leading companies engaged in the design, development, manufacture and sale of industrial batteries and power supply systems.  China Shoto operates from extensive modern facilities in Jiangyan City which is in Jiangsu Province, some 220 kilometres from both Shanghai and Nanjing, and has a large research and development facility in Nanjing.  Following Admission the Group will also have a significant interest in Beijing Full Three Dimension Power Engineering Co., Ltd. ("FTD"), a leading turbine design and refurbishment service provider in China.

 

Significant investment in new factories and equipment has been made over the last three years and the Group has a comprehensive distribution and service network covering the whole of mainland China.  The Group¡¯s products are widely used in telecoms, electrical power, the Uninterruptible Power Supply (UPS) market, electrical bicycles, railway locomotives and passenger trains and other markets.

 

China Shoto is a leading supplier of lead acid batteries to major Chinese companies such as China Telecom, China Mobile, China Unicom, China Netcom and China Tietong.  China Shoto intends to target those domestic markets which have significant growth potential, such as the telecoms market where it is the leading supplier, and use its competitive position to exploit opportunities outside China.  Overseas sales are being developed through an agent in Russia and directly to North America, Europe, Australia and Asia.

 

China Shoto is principally involved in the production of a comprehensive range of stationary lead acid (¡°SLA¡±) and motive lead acid (¡°MLA¡±) rechargeable batteries.  There are two primary lead acid battery technologies: valve-regulated (VRLA, or sealed) and Flooded (vented).  Two types of VRLA technologies exist ¨C Gel and AGM.   These are sold as individual units or as battery systems for a wide range of industrial applications.  The three main categories of application are:

 

	reserve power batteries, for example for telecommunication and computer back up systems;
	starter batteries, for example for rail locomotives (but not automotive); and
	power batteries, for example for electrical bicycles and tools.

 

China Shoto also manufactures a range of related products including chargers, power equipment and battery accessories and owns all the intellectual property in respect of the products designed, manufactured and sold by the Group.

 

AGM batteries, which have a mature technology, are widely used throughout China. Their low maintenance, high reliability and low cost have lead to them being used as the principal back up power supply in many industries.  The Group has been providing AGM batteries since 1995 and the Group¡¯s AGM range now comprises 28 products.

 

Gel batteries are a newer technology, providing stable performance, high reliability and long service life.  Gel batteries are commonly used in North America and Europe but China Shoto believes there is significant potential in China where Gel batteries currently have a small share of the overall battery market.  The Group believes that Gel batteries will become more widely used in China and that China Shoto, as the first manufacturer of Gel batteries in China, is well positioned to exploit this market.

 

Flooded batteries, although a mature technology, are still widely used at present and the Group has therefore maintained an updated and complete product range to address the varied requirements of its customer base.

 

The Chinese economy continues to grow strongly with an average growth rate of 9.4% over the last 27 years.  Much of this growth has occurred and continues to occur in areas where the Group¡¯s products are widely used including transport, telecoms, industrial processes, banking and finance, and power generation.

 

Global demand for electricity is increasing and there are growing areas where critical operations cannot be interrupted such as in wireless high speed communication, the Internet, essential electrical operations and transportation.  The applications for UPS are increasingly dependent on the stored electrical energy in batteries such as those produced by China Shoto, with high market growth forecast for the battery market for the foreseeable future. The rapid development of computer networks has further increased demand for uninterruptible power supply and China Shoto is already the largest domestic supplier to this market.

 

Telecoms account for approximately 50% of the global SLA battery revenues.  In 2003 the SLA battery market generated globally approximately US$1.45 billion in revenues and this is forecast to rise to US$2.53 billion by 2010.  The Asia Pacific region accounted for some 24% of global SLA revenue in 2003 and its contribution is forecast to increase by some 9.5% compounded annually during this decade.  Demand for SLA batteries is driven by increased demand for telecom infrastructure, increase in bandwidth and network expansion, particularly in the wireless domain.  Global demand for SLA batteries is expected to be driven primarily by the service sector, itself a key driver of global economic growth.  Revenues arise from the supply of original equipment and for the after-market where margins are usually higher.  The replacement of batteries for existing capital equipment such as network devices and telecom switches is expected to account for one third of total SLA battery sales.

 

The global MLA battery market (comprising both VRLA and flooded batteries) generated revenues of US$1.42 billion in 2003 and is forecast to grow at approximately 3.9% compounded annually over the remainder of this decade.  The Asia Pacific region accounted for some 17.3% of the 2003 global revenues, expected to rise by 4.9% compounded annually during the period to 2010.  Some 60% of MLA revenues are attributable to the supply of original equipment with the balance attributable to the after market, where margins are higher. The growth is expected to reflect demand from the manufacturing sector coupled with demand for environmentally friendly equipment and vehicles.

 

Environmental issues have led to an increasing investment in electrical vehicles and in China this market is dominated by electrical bicycles.  In 1998 annual production was 54,000 bicycles and this has increased to 6 million by 2005.  This growth has created significant demand for power type lead acid batteries with an estimated market value of £1 billion within the next decade.  In addition to the new bicycle market there is a very strong demand for replacement batteries given that bicycle batteries typically last between one to two years.  The success of this market will depend on sustaining profitability through large scale efficient production, brand recognition and strong service networks, all of which China Shoto has.

 

China Shoto has the largest market share in the locomotive and vehicle sector in China which uses its locomotive AGM MLA battery, and railway communications will provide an opportunity to grow revenue in the sector.

 

China¡¯s electrical power industry is expected to see high investment over the coming years.  This is expected to encompass the expansion and upgrading of electricity transferring networks and a near doubling of network capacity by 2010.  Flooded batteries are most commonly used for utility applications as they perform better at higher temperatures and are tolerant to abuse.  Although usage of Gel batteries is expected to increase in this sector, flooded batteries are likely to remain dominant over the next few years.  China Shoto¡¯s products are already widely used and accepted in the sector.

 

China Shoto historically focussed on its domestic markets but believes it is now in a position to exploit market opportunities overseas.  All products are designed and manufactured to meet international standards and the additional benefit is that costs of production are lower than those achieved by manufacturers in Europe and North America.

 

The Group has only recently started to put in place its plans to address overseas markets but in 2004, overseas sales already accounted for 2.6% of total sales.  This is largely represented by Gel battery sales in North America, Russia and South East Asia.  Typically in North America and South East Asia AGM batteries dominate the market but Gel battery demand is growing strongly.  In Europe, Gel batteries are more widely used with an estimated market share of 70%.  China Shoto is licensed to export to the key international battery markets and the Group intends to increase the level of export sales, penetrating additional markets, with the key driver expected to be its Gel batteries.  As in China, the telecoms sector is targeted for significant growth.

 

In the year to December 2004, China Shoto reported revenues of £18.7 million, pre-tax profits of £1.8 million and net income of £1.5 million.  The audited interim results for the six months to June 2005 show a rapid rate of growth, with revenues of £11.8 million, pre-tax profit of £1.8 million and net income of £1.5 million, at the profit level, matching the performance for the whole of 2004.

 

China Shoto conducts extensive R&D with its modern facilities based in Nanjing, employing approximately fifty highly qualified scientists and other professionals.  The R&D facility is responsible for the development of new products and technologies, as well as the continuous development of production processes, to improve quality, cost effectiveness and the sustainable development of the Company¡¯s core technologies.  The R&D facility has also developed strong relationships with leading Chinese universities, thereby supplementing the technological expertise available, and furthermore the R&D benefits from a level of government funding.  Current research projects include super capacitors, lithium batteries and direct methanol fuel cells.

 

In addition to the battery business, China Shoto also owns a 30% stake in a Beijing based turbine business called FTD.  With demand for electricity in China continuing to rise rapidly, the last five years has seen an increase of electricity consumption by an average of over 7% per annum, and the Chinese government is committed to increasing power generation capacity and reducing emissions.

 

FTD, a technology focused power engineering business, has concentrated historically on the redesign and reconstruction of older turbines and has to date reconstructed over 100 turbines.  However, recently FTD has also engaged in blade design and has utilised its turbine expertise to develop its own 150MW turbine.  This turbine now competes with 135MW turbines and is cheaper to install and operate.  FTD has also entered into an agreement with Shanghai Turbine Company to manufacture the first turbines, for which orders for five units have already been received, one of which has already been delivered and is in operation.

 

China Shoto believes that the utilisation of FTD¡¯s technology can make a substantial contribution to the achievement of the Chinese government¡¯s objectives, both by refurbishing existing turbines to increase their efficiency and cutting their emissions and through building new turbines utilising FTD¡¯s technology.  FTD intends to generate revenues in both areas of activity.  Following Admission to AIM, China Shoto intends to increase this stake to 65% by subscribing for new equity.  The other shareholders in FTD include turbine manufacturers and universities.

 

Cao Guifa, Executive Chairman, said: ¡°Demand for China Shoto¡¯s products in the Chinese marketplace continues to be strong.  We believe that the Group¡¯s decision to join the AIM Market will allow us to increase our penetration of the domestic market with both our existing products and new product lines, and for us to expand sales overseas.¡±

 

China Shoto also announces today the appointment of Bernard Asher as a non-executive director.  Bernard Asher was formerly an executive director of HSBC Holdings plc and Chairman of HSBC Investment Bank.  He is currently the Chairman of Liontrust, a UK equity investment fund, and a non-executive director of Morgan Sindall plc.  Previously he was non-executive Vice Chairman of Legal & General Group, Chairman of Lonrho Africa, IMH (formerly Seymour Pierce Group plc) and was a non-executive director of TIR Capital Protection Fund.

 

Commenting on the appointment of Bernard Asher as a non-executive Director, Cao Guifa, said: ¡°The Board is particularly pleased to welcome Bernard Asher as a non-executive Director.  Bernard brings with him a wealth of relevant knowledge as well as valuable experience of public company life from his time spent with HSBC and elsewhere.  Our aim is to further penetrate international markets and maintain our market leadership in China, and Bernard will play a key role in our strategy going forward.¡±

 

Seymour Pierce is acting as Nominated Adviser and as Broker to the Company.