Renewable Energy Trade (EBOD) shares (previous symbol CTDC) have risen sharply in recent trading sessions. The stock closed at $1.68 on November 27, 2012, and now trades around $4.00 after hitting a high of $4.39 on December 6, 2012. On November 28, 2012, we noticed the company issued a 6K regarding the sale of its ownership interest in a solar power project (asset) held by China Green Holdings Limited, one of its subsidiaries. The interest was sold to Goldpoly, an HK listed company. Here is a November 29, 2012, summary we originally provided to GeoInvesting premium members as we delved deeper into the story:
In a 6K filed yesterday, Renewable Energy Trade describes a transaction from one of its subsidiaries. The asset sale from China Green Holdings Limited ("China Green"), a wholly-owned subsidiary looks to be valued at $25.8 million ($10.3 million in cash). Based on the company's outstanding share count of 2.2 million the cash portion of the deal alone is worth $4.54 per share. We asked Bob to look into the matter. His initial findings are:
- Verified the transaction
- Verified the projects that EBOD is involved withA challenge in this story is that EBOD has not released any financial information since the release of a 2011 20F. The 20F showed that the company grew sales by 21% to RMB 65 million ($10.3M) but net loss increased by 82% from RMB 35 million ($8.1M) to RMB 64.6.2 million ($10.2M). The cash balance declined from RMB 14 million ($2.1M) to RMB 5.35 million ($0.85M) and experienced a huge jump in inventories from RMB 6.8 million ($1M) to RMB 119.6 million ($19M). The company had shareholder equity of RMB 58.8 million (USD 9.3 million).
Since we do not have insight into EBOD's most recent financial data, it is hard for us to give a reasonable value to EBOD. However, as the general investor can imagine, we regard that the transaction with Goldpoly can absolutely increase the EBOD's cash balance and assets. This may help EBOD to jump-start its new business.
Unfortunately, further due diligence cannot give us the green light to go long this name given the company's sketchy history, which we discuss in this report. SEC filings, dating back to 1998, show that EBOD never recorded an operating profit, has made numerous questionable investments and has gone through several business ventures. Furthermore, the company has cycled through 5 CFOs since 2001 (3 within the last four years). Also, investors who bought EBOD due to information in a December 5, 2012 Seeking Alpha article thinking the company was a provider of solar products, as shown on its Yahoo profile page, will be shocked to find out that this is not the case at all.
Summary of the findings include:
- EBOD appeared to be a busted stock headed for a delisting, and only a 1 for 10 reverse split allowed the company to avoid delisting by getting its share price back to $1.00. The point is that pre-split the stock was 40 cents, so the $4 post-split price is a little misleading.
- A recent article about EBOD on Seeking Alpha which was extremely bullish contained a number of mistakes, including wrong information regarding EBOD's cash and liabilities and the consideration received in the recent asset sale. The most current financial information contradicts the author's conclusion that EBOD cash assets exceed its liabilities. In reality EBOD is a company with liabilities exceeding cash as opposed to the opposite conclusion reached by the author.
- The article's unbridled enthusiasm for EBOD's prospects in the solar energy sector seems to have been based on nothing more than its business description as shown on Yahoo Finance. However, as shown on its website, EBOD is no longer even in the business of making solar products at all. The information on Yahoo Finance is outdated. This finding also renders the author's conclusion that EBOD is worth $4.60, or 1 x current sales, unreliable.
- EBOD (December 31 year end) is a foreign filer that is delinquent in filing its financials with the SEC. We have not seen any financial information from EBOD since 2011. We located the relevant rule for investors:
- Even the potential receipt of the funds from the asset project transaction may not be ample enough for the company to cover its liabilities, especially when we consider the costs associated with winding down its solar operations and beginning its new unproven venture.
- The company has an operating history riddled with business goals that have been all over the map
"(Pursuant to Listing Rule 5250(c)(2), all foreign private issuers must file a Form 6-K with an interim balance sheet and income statement as of the end of its second quarter. This information, which must be presented in English but does not have to be reconciled to U.S. GAAP, must be provided no later than six months following the end of the company's second quarter)."
This act alone should be adequate reason to approach this story with extreme caution
On December 5, 2012, JDBloomington published an article titled "Renewable Energy Trade Board: A Micro Cap Chinese Solar Company Set To Shine," briefly highlighting an asset transaction. The author went on to boldly compare EBOD to other solar companies such as First Solar (FSLR) and Sunpower (SPWR) stating that:
- The Company lists cash assets of $3.53 million against obligations of $580,000 for a net cash position of $2.9 million or $1.29 per share
- In the transaction, China Green Holdings Limited expects to receive HK199,870,000 ($31,725,396) as consideration of the entire sale of its asset.
The first sign that made us question the author's due diligence was his application of exchange rates. The exchange rate between HK$ and USD is around 7.75 HK$ to 1 USD. Based on the correct exchange rate, the HK$ 199,870,000 equates to USD 25.789,000, not $31,725,396. The exchange rate used by JD in his article is 6.3, which is the exchange rate between RMB and USD (6.22).
Share prices, which have been in a steady decline since the beginning of 2011 and take into an account a 1 for 10 reverse split recently enacted to regain NASDAQ compliance…
While we applaud the author's attempt to delve into the rough terrain of the ChinaHybrid universe and encourage him to continue these efforts, we seriously question his findings for the following reasons.
EBOD Is Not A Solar Products Provider Anymore And Makes An About-Face On Its Business Direction
JD's comparison of EBOD to the likes of FSLR and SPWR is far from relevant as his conclusion that pins EBOD at 1x current sales, resulting in a long-term price target is $4.60. We will show that EBOD is winding down its solar manufacturing/products industry, rendering any valuation scenario based on past sales data totally inaccurate.
Apparently, investors may be referencing the company's description in the most recent 6k:
EBOD is a fast growing clean energy group in China based in Hong Kong, providing solar energy products and solutions to the global market under the "LSP" brand.
EBOD's previous symbol was CTDC (China Technology Development) which held the description that this 6K referenced. Here is another more detailed description that existed within various SEC filings under the symbol CTDC:
"We are a provider of solar energy products and solutions in China.. In September 2007, we entered into the solar industry by manufacturing SnO2 solar base plates, which are a type of transparent conductive oxide, or TCO glass. TCO glass is a key component of thin-film solar cell. In 2010, we commenced manufacturing solar modules from monocrystalline and multicrystalline solar cells. In 2011, we participated in the development of solar farms in Italy. Also, we have been working on a project for constructing and installation of rooftop solar systems in China since 2011."
CTDC became EBOD on October 24, 2012. Well, investors may not be alone in incorrectly describing EBOD's current business operations, as it seems that the company can't even get its current description right. Along with the symbol change to EBOD, the company has also changed its business direction towards operating some type of trading platform and consulting business geared to serving the power plant industry. This can be seen as clear as day on its website:
"Vision: Make China 's first global power station trading platform:
"Use of the international financial platform, the most professional new energy construction and management experience, and the most abundant Power plant resources, will stock change deal for introducing the concept of new energy industry."
Apparently, as shown by the red arrows indicating that its solar business model was a risky venture, the company has abandoned its goals to be a provider of solar energy products and solutions and now intends to offer some type of energy trading platform and consulting business to power plant firms.
Thus, rendered useless are any of the past financial data points or news items that may have convinced investors that EBOD is about to make a bundle of money making solar cells and related products or that led him to believe that FSLR, let alone any solar company is a comparable to EBOD.
To be candid, we have no idea what the full scope of EBOD's operations now entail.
We have no access to EBOD's current financials since the company has not reported any for 2012. . However, it is reasonable to assume that EBOD needs to use a substantial amount of money to wind up its legacy solar manufacturing business and start its new business. Aside from information on its website, as of today EBOD has not disclosed any information regarding winding up its legacy manufacturing business. If solar operations have not been wound up yet, all we need to do is compare EBOD with the recent negative financial performance of leading Chinese solar companies such as Trina Solar (TSL) , Ldk Solar Co (LDK) and Suntech Power Holdings Co (STP) to conclude that the much smaller EBOD incurred a big 2012 loss in its legacy business.
Furthermore, we still have little clues on how EBOD plans to generate any substantial profits from its new business venture.
Liquidity Crunch: The USD 10.3 Million in Cash EBOD Received from the Deal with Goldpoly May Not Be Enough to Cover EBOD's Possible Liability In 2012
JD calculated the cash fair value of EBOD by simply taking his cash value assumption divided by the 2.25 million shares outstanding. He also assumed that the company, pre-transaction, lists cash assets of $3.53 million against obligations of $580,000 for a net cash position of $2.9 million or $1.29 per share. We do not know where he gathered his cash and liability information from, since the link he provided to justify his calculations references the 6k asset transaction filing which makes no reference to EBOD's cash and liability standing.
In reality, the company is far from current with its financials as evidenced by the fact that the last financial filing the company submitted to the SEC was a 2011 20F (annual report).
EBOD is a foreign filer. A close inspection of the 2011 20F does not paint the picture that JD has sketched, mainly on the liability side of the balance sheet which shows that the company's obligations are much higher than his half a million dollar assumption and are not in a net positive cash position.
- While 2011 sales rose around 20% to $9.7 million, operating loss increased from $4.25 million to $6.9 million
- 2011 year end cash and cash equivalents were $ 0.848 million ($3.512 million if Trading securities and Available-for-sale securities are added in) down from $2.0 million in 2010 ($9.2 million if Trading securities and Available-for-sale securities are added in).
- 2011 year-end Inventories skyrocketed by 1800% to $19 million.
- Current ratio of only 1.07 (Current assets of $35.3 million divided by Current liabilities of $32.7 million) compared to 2.48 in 2010.
- 2011 year-end total liabilities of $33.5 million with account payables at $25.5 million.
- Shareholder equity declined 47% to $9.3 million.
Now, some may argue that the 2011 financials show shareholder equity of $9.3 million or $4.13 per share. But this number is likely outdated and inaccurate as it looks like the company is in the process of winding down its solar business. Thus far, as indicated in the 2011 20F, the company has transferred its solar R&D arm, China Merchants Zhangzhou Development Zone Trenda Solar Limited ("Trenda"), out from company. However, based on the disclosures, its legacy solar power production, and marketing subs: Linsun Power Technology (Quanzhou) Co., Ltd. ("Linsun"),Shenzhen Helios New Energy Technology Limited ("Helios") and LSP Solar GmbH had still not been wound down. These entities, minus the R&D arm, employed around 200 people as of December 31, 2011.
Given the company's financial standing as of December 31, 2011, $9.3 million total equity includes USD 19 million of inventories. Based upon the decrease in prices and sales of solar energy products in China in 2012, EBOD may have neared insolvency.
We presume that weakness in the once hot PRC solar market is what may have led EBOD to change its business direction and wind down its legacy solar products business operated by around 200 employees. We have little doubt that the wind down process would eat up a large amount of cash. EBOD also claims to have started its new energy plant trade platform business. Currently, it seems that this new business has still not generated any substantial revenue. Therefore, we question if EBOD has enough cash to wind down its legacy business and start its new business in 2012.
Furthermore, the new asset deal with Goldpoly provides EBOD only USD 10.3 million cash. The other 10.3 million convertible bonds and remaining shares are subject to a lock up period. Based upon EBOD's business performance, we do not believe that this USD 10.3 million cash can be enough for EBOD to service its liabilities.
Details of the Deal with Goldpoly May Question EBOD's Management Team's Due Diligence
Here is some perspective to lend understanding of the asset transaction:
At some point in its history, EBOD established a wholly owned subsidiary called Sinofield Group Ltd (current name: China Merchants New Energy Holdings Limited.) with the purpose of developing/managing a roof top solar project on land it owned. In March and April of 2012 the company sold 75% of its ownership in Sinofield to two entities, China Merchants New Energy Group Limited ("CMNE") and GCL-Poly. Sinofield subsequently took on the name CMNE Holdings (CMNE) and is the asset that EBOD has sold this November.
On May 14, 2012, EBOD sold 15% of its ownership in CMNE Holdings to Goldpoy and a company named Hyatt Servicing Limited for the consideration of only HK$ 37,305,621 (USD 4.8 million). EBOD received:
- 22,905,621 Goldpoly shares (HK$21,600,000) (9% of CMNE Holdings)
- HK$ 14,400,000 cash (USD 1.858 million) (6% of CMNE Holdings sold to Hyatt Servicing Ltd.)
On Nov. 28, 2012 EBOD filed another 6K regarding the asset project transaction. The filing revealed that EBOD sold another 8.69% of its interest in CMNE for the consideration of HK$ 199,870,000 (USD 25.79 million) as follows:
- 139,974,000 Goldpoly shares (HK$ 39,974,000);
- HK$ 79,948,000 (USD 10.3 million) convertible bonds tied to the CMNE project. The conversion period will commence from the day immediately after the end of the first anniversary of the issue date and ending on the maturity date, subject to the terms and conditions under the Consideration CB instrument.
- HK$ 79,948,000 (USD 10.3 million) cash.
When we compare the consideration EBOD received for the sale of 15% of its interest in CMNE holdings on May 14, 2012, (USD 4.8 million including only USD 1.86 million cash) to the consideration it received for the sales of its 8.69% interest CMNE Holdings on Nov. 28, 2012, (USD 25.79 million, (including USD 10.3 million cash and USD 10.3 million convertible bonds) , we question why EBOD sold the same assets on May 14, 2012 for around 90% lower than the sale price on Nov. 28, 2012?
Furthermore, Hyatt Servicing Ltd., which purchased 6% of CMNE Holdings for USD 1.858 million, also sold the same interest on Nov. 28, 2012 to Goldpoly which may be around USD 17.8 million. Thus, in about a half year, Hyatt Servicing Ltd. achieved around 10 times return for its investment.
The questions that arise from these events are:
- Why did EBOD sell its 15% stake of CMNE holdings on May 14, 2012 at such a low price?
- Who really controls Hyatt Servicing Ltd., which made around 10 times return in about a half year?
- Are we to believe that in all these negotiations and due diligence that EBOD's management team really made an honest miscalculation of the value of the CMNE Holdings?
Our concerns are magnified given EBOD's past track record.
Unimpressive Operational History Gives Us Little Confidence In EBOD's Future
EBOD filed its first 20F on June 28, 2001. After perusing all of the company's filings we noticed that its China business goals have been all over the map. A complete history of EBOD evolution can be seen on page 16 of its 2011 20F.
- From inception until July 1999, through its subsidiaries, it had joint venture interests in a manufacturer of enameled steel and cast iron bathtubs as well as a manufacturer of ceramic wall tiles. In July 1999, all of these interests were disposed.
- Through a 2000 acquisition it entered the network security, network management and e-business software development business. On February 16, 2009, this business was sold for a whopping HK$0.2million as opposed to the HK$1 million it originally desired.
- Through the October 31, 2005 acquisition of Anji Bio, the company aimed to develop ingredients for health food products and food supplements utilizing bio-active components of bamboo. This venture was disposed of within a year of its addition to the company when it "realized" it could not exert control over the operational and financial aspects of Anji Bio.
- Entered the "sexy" green energy sector when it acquired 100% China Merchants Zhangzhou Development Broad Shine Solar Technology Ltd. on December 10, 2007.
- On October 27, 2009 it intended to expand its solar operations when it entered into a stock purchase agreement to take a 51% equity interest in China Technology Solar Power. The company paid US$3 million in cash to Good Million Investments Ltd., the direct shareholder of CTSPHL Group, as a deposit for the transaction. On October 11, 2010, it entered into an agreement with CTSPHL Group to terminate the stock purchase agreement:
- On January 28, 2010 EBOD decided to expand the scope of its business and determined that the advertising and media business presented a significant opportunity for the company. On April 28, 2010, it entered into a Cooperation Framework Agreement to acquire the entire equity interest in Xintang indirectly. Xintang is a Chinese company and conducts advertising and media business in China. The company paid a down payment of more than Renminbi ten million to Xintang and its shareholders, but eventually bowed out of this deal and abandoned its advertising business goals.
- In early 2012, EBOD started the roof top CMNE Holding project. As we have discussed, EBOD has sold its interest in the project to Goldpoly.
- Currently, and we mentioned earlier in this report, that EBOD has now embarked on its new energy trading platform/consulting business.
"Pursuant to this termination agreement and subsequent amendments, CTSPHL Group was required to repay the cash advance to us in installments by August 31, 2011. We received the first installment payment of US$1 million in June 2011 and entered into a deed of share charge with Good Million Investments Ltd. on June 27, 2011 to secure the repayment of the remaining US$2 million. Due to Good Million Investments Ltd.'s failure to repay the remaining US$2 million by August 31, 2011, we enforced the security created by the deed and, as a result, we acquired 29,433,962 shares of a Hong Kong listed company with stock code 08111."
EBOD could receive USD 10.3 million cash, USD 10.3 million in convertible bonds and some Goldpoly shares if the disclosed project asset deal is consummated. There is no doubt that this deal could increase EBOD's total assets and equity.
However, EBOD has not disclosed its 2012 financial information. Based on its financial statement as of Dec. 31, 2011 and its claimed business change, we regard that its USD 10.3 million cash and USD 10.3 million in convertible bonds may not be enough to cover its liabilities incurred in 2012 when EBOD due the wind-down of its legacy solar power production business and start of its new solar power trade platform business.
Furthermore, EBOD may not generate any substantial revenue from its new claimed business. If this is the case, EBOD may only become a cash burn machine.
From the details of the deal with Goldpoly, we question EBOD's management team's due diligence regarding its price strategy. At the same time, based upon the frequent business changes in its corporate history and the fact that company never reported an operating profit dating back to 2000, we do not believe management can successfully put together a well-run profitable business.
Therefore, we cannot assign any reasonable value to EBOD and are placing a strong sell on the stock. We believe it will quickly retrace its recent upward move.
Disclosure: I am short EBOD.
Additional disclosure: Because of the EBOD’s low float, investors, whether long or short, will most likely have to endure some volatility in the stock’s price.