China Recycling Energy (NASDAQ:CREG) is a company that is helping China's manufacturing companies keep its pollution down while generating energy from its waste output. The manufacturer will let CREG set up the systems and then CREG will lease the systems back to the manufacturers for a period of 5 to 30 years.
CREG has a $120 million cap. 60,950,000 shares as of June 30th plus the 8,233,779 shares it issued for the Yida project plus the 13,829,074 shares it issued to the Chairman on August 27th. This all adds up to 83,012,853 shares outstanding. Multiply this by the August 29th closing price of $1.45 a share and it is a $120,368,636 market cap.
Tangible book value is approximately $177 million - the $162 million tangible book value as of June 30th 2014 and approximately $15 million the CEO paid for the shares on August 27th.
Chairman/CEO Mr. Ku has invested over 30 million dollars of his own money in the last six months to help CREG grow. The $18.9 million for the new shares plus the $11,813,443 the company has loaned from him as of June 30, 2014 at zero interest.
In a previous SA article, "2 Large Shareholders appear ready to dump shares of China Recycling Energy" the author presents a theory as to why CREG's stock is broken: Too many sellers and too few buyers. In Mr. Ku's quest to grow the company, he is selling shares of his company to finance the projects. The last project financed by shares was to the Yida project. The Yida company was paid in stock that was worth an average of $2.27 a share at the time of the transaction at the end of the June 2014 quarter, and is now only worth $1.45 a share.
This presents a serious overhang. The stock is broken simply because the average shares traded per day is 95,000 and the companies that CREG sold new stock to cannot sell their positions in the open market without dropping the stock's price like a rock. The article refers to two companies that want to sell the shares now... however with extensive research, I come up with a different thesis in that Carlyle does not want to sell shares of CREG due to its strong potential in the near future and that is why they terminated the SPA. However, the other company mentioned in the article and the Yida company cannot sell their positions without dropping the stock's price too far. Any good news will be sold into simply because that is when new buyers will provide more liquidity.
Looking at the last quarter's earnings report ending June 30, 2014, CREG lists the projects under construction that will double the sales-type leases in the next 2 years. Six new projects, five of which are using the CDQ method of recycling energy, will double the sales-type lease earnings that CREG's 15 current projects earn now. Sales-type leases are the bread and butter for the earnings. As you can note, the March 2014 quarter has no new projects sold yet they still pulled in 3.1 million in earnings!
So, there we have it. $57 million under tangible book value as of August 28th. Earnings under sales-type leases set to double in 2 years with a current PE of 5.
Now do you see why the CEO invested another $19 million to buy 13,829,074 shares at $1.37 a share?
Disclosure: The author is long CREG.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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