Since my last article on SkyPeople Fruit Juice (NASDAQ:SPU), there have been quite a few developments. Some good, and some not so good. First, the bad - SPU hasn't filed its 2015 10-K and 2016 10-Q. However, this is more common than most people think, and shouldn't be seen as an imminent risk when the company is operating as a going concern and has released statements to comply with SEC standards to file both its 10-K and 10-Q in a little over a month by September 2016. Some commentators have linked this sort of behavior to SunEdison's bankruptcy. However, it is a fallacy to do so.
SunEdison (OTCPK:SUNEQ) is different for many reasons. One being that the company increased its debt load by over $8 billion in less than a year in an industry that is widely seen as unprofitable without the Federal Tax Credits (FTCs) which the solar industry literally survives on. Also, the now-bankrupt SUNE had cash issues and accounting improprieties that were being investigated by the SEC amidst the company's inability to properly file its 10-K in a timely manner.
Furthermore, SUNE's subsidiaries, TerraForm Global (NASDAQ:GLBL) and TerraForm Power (NASDAQ:TERP), are extremely risky and financially complex Yieldcos that require unsustainable debt loads in the currently low interest rate regime, combined with the FTCs to survive as well, and are currently cash flow-negative until 2018. The solar industry, especially Yieldcos, experienced a debt surge about 4 years ago, and since then, the bubble has worn off. The only ones that will survive, in my analytical opinion, are the ones that have excellent parent health, such as NextEra Energy's (NYSE:NEE) Yieldco, NextEra Energy Partners (NYSEMKT:NEP), due to its ability to provide superb dropdown financing over the longer term. Conversely, SUNE never had the financial capacity or managerial operational experience of a company such as NEE.
Without further ado, back to SPU. The recent announcement by the company to create an international trading platform was one of my recommendations in my magnum opus on SPU back in January 2015.
My underlying thesis of expanding internationally was that the yuan is under massive pressure to weaken. I mentioned this almost a full year before any mainstream analyst even began thinking the currency would weaken. My year-end 2017 target for the yuan is 8.50 to the dollar. My other major macroeconomic thesis that has come full circle was the slump in oil prices, which I originated in October 2014, when oil was trading over $100. I stated that deflation was going to be the natural state of the world, and that the dollar as well as the bond industry were going to experience one of the biggest rallies in their entire history - both of which are coming to fruition. I believe we will see the 10-year Treasury at 80 basis points by year-end 2017. With over $12 trillion in sovereign debt trading at negative yields, the U.S. Treasury bond is a city on a shining hill.
Here is the partial transcript of the ground-breaking announcement by SPU last night:
"The New Global E-Marketing Platform to Promote International Sales XI'AN, China, July 28, 2016 /PRNewswire/ - SkyPeople Fruit Juice, Inc. (SPU) ("SkyPeople" or "the Company"), a producer of fruit juice concentrates, fruit juice beverages and other fruit-related products, today announced that it has formed SkyPeople International Trading (HK) Limited ("SIT"), a subsidiary that has been incorporated in Hong Kong, to operate as a global trading and marketing platform to optimize SkyPeople's Hedetang fruit juice product portfolio and reinforce its leading market position."
You can read the full announcement here.
This development is extremely bullish, considering it will expand access to over 50 countries. It couldn't have come at a more crucial time either, as the yuan is under pressure from capital escaping to foreign real estate markets as wealthy Chinese look to foreign assets to diversify their own currency risk. It isn't surprising, considering China's shadow banking and total debt capacity are beyond what is sustainable. In 1Q16 alone, total credit instruments increased over $1 trillion, in an effort to pay off nonperforming loans in the banking sector and to cover interest payments. Regardless, even with the systemic domestic risks, it isn't a major hindrance to a health drink product that doesn't really depend on broader macro consumer debt increases. SkyPeople's products are almost a necessity in the smog-filled cities of China, and should have good success in the surrounding southeast Asian nations initially with its price competitiveness and product purity/quality.
I'm confident a product like this would do well in the U.S., where there are no product offerings that have kiwi as the main ingredient, and thus, SkyPeople will quickly differentiate itself from competitors. In short, I'm still bullish on SPU and believe the long-term value-accretive announcement was a major milestone. Now, the next steps for SPU will be to release its delayed 2015 10-K and 1Q16 reports. After this, it can again focus on exports and gaining foreign fruit juice market share, zeroing in on its product differentiation. Expect more price volatility, as we have seen the shares rise from ~$2 to ~$20 and back down to ~$12 in less than a week. However, this is expected in the short run, and will stabilize eventually as exports take up a larger share of SPU's revenue. This also has a sort of second derivative effect in that the increasing share of foreign revenue will inevitably attract more foreign capital and institutional holders that like to see geographical cash flow diversification and, eventually, even a dividend to boot.
Disclosure: I am/we are long SPU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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