Market Opportunity

The key to China Digital's growth lies in the soaring demand for mobile digital products and power sources. The record of its E'Jenie subsidiary shows how fast this market is expanding.

E'Jenie was founded less than three years ago - in May 2002 -- with one steel-shell production line. It quickly took advantage of China's rocketing demand for mobile phones, adding three more production lines before the end of its first year. By the end of 2003, it had 14 steel-shell production lines. In 2004, the year of its acquisition by CHID, it bought five aluminum-shell production lines, added to a pair of battery-cap lines purchased earlier. The upshot of all this is a projected manufacturing volume of 100 million product units in 2005.

Why such rapid growth? The answer can be found in the sharply rising demand for new mobile phones in China. Not only are more Chinese consumers buying the phones, but current users are also constantly upgrading as new phones with new features are introduced into the market. A mobile-phone battery has a typical usage life of 300 to 500 recharges, which translates to a ratio of 1.8 batteries in service life of each phone, according to official Chinese statistics. However, battery replacement demand is faster than this when consumers turn in their phones for new models before the normal life of the battery is over. A short product life combines with a short product innovation cycle to create rapid product turnover - and plenty of business for battery shell makers.

All told, China's domestic mobile phone battery market is expected to expand in 2005 to 570 million units, up from 450 million in 2003. The worldwide market will see a two-year rise to 2.52 billion from 2.16 billion. In dollar terms - more meaningful for CHID investors - domestic battery sales in China are expected to rise to $2.1 billion in 2005, up $264 million, or more than 14%, from 2004.

CHID is profiting from another boom, that of China's manufacturing sector. Makers of batteries and electronic products are direct customers for components made by CHID's E'Jenie unit. Their own growth - fueled by exports as well as rising domestic demand -- translates into higher sales for CHID. China's entry into the World Trade Organization and the continued privatization of its industrial base will continue to fuel this expansion. State-owned enterprises are continually being reborn as private firms, adding to the market for companies, such as CHID, that supply parts and materials to manufacturers. While these firms have been mismanaged in the past, they also retain strong connections to government buyers, which give them a leg up as they venture into capitalism. CHID expects to be supplying more and more of these companies in coming months and years.