Cleantech Solutions International Inc. (NASDAQ: CLNT), through its affiliated companies, designs, manufactures and distributes a line of proprietary high and low temperature dyeing and finishing machinery to the textile industry.
The company is being acquired by YSK1860 (an investment holding Company). Pursuant to the terms of the agreement, YSK1860 purchased all shares of Cleantech previously held by the company’s Chairman and CEO, Mr. Jinhua Wu, and his affiliates. It acquired 416,249 shares for about $970 million, or $2.33 per share.
As per management, Mr. Wu and his affiliates decision to sell their shares was based on personal factors, and Mr. Wu will continue to retain his positions as Chairman and CEO of Cleantech Solutions going forward.
Dr. Thomas Chan, director of YSK1860, said, “This investment in Cleantech Solutions demonstrates our trust and confidence in the US stock market and the Company for its long-term growth potential and opportunity to participate in the growing Chinese energy market. We also expect to leverage our investment expertise and connections in the technology, media and telecommunications sectors to support Cleantech Solutions in identifying new business opportunities in the future. We are confident in the current management’s ability to put this year of transition behind us and focus on improving the long-term business outlook.”
This event has infused significant liquidity in the company and the stock has spiked more than 70% following the news. The company, say experts, looks like a good bet considering recent developments along with its longstanding track-record of operations and strategic operational decisions that the company has taken.
On April 17th, CLNT announced financial results for year ended December 31, 2016. Revenue decreased by 40.1% to $17.4 million. Revenues declined due to an anticipated slowdown in shipments of low-emission airflow dyeing machines. Additionally, the business was also affected by government actions requiring textile manufacturers in Zhejiang province to temporarily cease operations. Gross profit for 2016 was $2.5 million, compared to gross profit of $6.5 million for 2015. The company experienced a decline in margin that was attributable to a reduced scale of operations. Net loss for 2016 was $11.7 million, or $(9.79) per basic and diluted share, compared to net loss of $12.8 million, or $(12.97) per basic and diluted share, in 2015. Company’s core dyeing machine business felt the impact of China’s difficult economic environment.
As per management, 2016 was a year of transition for Cleantech Solutions. With its forged rolled rings and related components and petroleum and chemical equipment segments continuing to perform poorly, it decided to exit these two segments.
Management believe that its focus on the dyeing equipment business, developing next generation dyeing and finishing equipment based on CLNT’s recently acquired ozone-ultrasonic patent technology, will usher in significant benefits in the logistics chain across sectors.
Moreover, there would also be increased synergies due to Cleantech’s recent investment in Wuxi Shengxin New Energy Engineering Co., Ltd. (“Shengxin”), a newly formed company that plans to build solar farms in Guizhou and Yunnan provinces.
Analysts expect the ongoing traction in the company’s operations and incremental revenue from the newly acquired businesses to support the growth momentum of the company over the near to medium term. For the first quarter of 2017 (results due 5-16-17), CLNT expects that its revenues will remain at or about its’ current level in the near future, although declines are possible.
With the recent developments, we believe the company’s stock is categorized as ‘HOLD’. That being said, the company is reflecting reasonable bullish signs and has a near term price target of $5.45/share.
Recent events in detail:
YSK1860, an investment holding company with investments in different countries covering diverse sectors from infrastructure, construction, real estate, trading to environmental and the Internet, acquired all of the shares of Cleantech previously held by Cleantech Solutions’ Chairman and CEO, Mr. Jinhua Wu, and his affiliates.
YSK1860 purchased 416,249 shares of Cleantech Solutions stock from Mr. Wu and his affiliates for $970,000, or $2.33 per share. Mr. Wu and his affiliate’s decision to sell their shares were based on personal reasons, and Mr. Wu will retain his positions as Chairman and CEO of Cleantech Solutions going forward.
Discontinued operations: During December, CLNT sold 100% ownership in Wuxi Fulland Wind Energy Equipment Co., Ltd and discontinued its forged rolled rings and related components business.
Additionally, management decided to discontinue its petroleum and chemical equipment segment due to significant declines in revenues and the loss of its major customer.
Therefore, assets and liabilities of these two segments have been classified on the consolidated balance sheet as assets and liabilities of discontinued operations as of December 31, 2016 and 2015 and the operating results have been classified as discontinued operations in the consolidated statements of operations for all years presented.
In March 2017, the Company sold certain manufacturing equipment that was previously used in the discontinued petroleum and chemical segment. These assets amounted to approximately $1.1 million, which were included in the assets of discontinued operations on the consolidated balance sheets at December 31, 2016
Stock split: Cleantech avoided delisting by the NASDAQ through the use of a 1:4 reverse stock-split effective March 20, 2017.
2016 Results
- Earnings: Revenue for 2016 decreased by 40.1% to $17.4 million, as against $29.0 million for 2015.
Rationale for muted growth in revenue: Cleantech’s only source of revenue was its dyeing and finishing business, since forged rolled rings and related products and petroleum and chemical equipment businesses reflected as discontinued operations.
Revenues declined due to an anticipated slowdown in shipments of low-emission airflow dyeing machines as many companies in the dyeing industry had already upgraded to new models and did not require additional equipment, and orders for new low-emission airflow dyeing machines slowed down in 2016.
Business was also impacted by government actions requiring textile manufacturers in Zhejiang province to temporarily cease operations in order to improve air quality ahead of the G20 Summit in Hangzhou during September 2016.
- Profitability: Gross profit for the 2016 was $2.5 million, against $6.5 million for 2015. Gross margin was 14.7% during 2016 compared to 22.4% for 2015. The decline was led by reduced scale of operations and increase in raw material costs.
For the years ended December 31, 2016 and 2015, company recorded bad debt expense (recovery) of $1,038,000 and $(52,000), respectively.
Loss from continuing operations was $1.4 million, or $(1.17) per basic and diluted share, compared to income from continuing operations of $3.0 million, or $3.04 per basic and diluted share in 2015.
Loss from discontinued operations was $10.3 million, or $(8.62) per basic and diluted share, which includes a $6.4 million loss on sales / disposal of discontinued operations. Against a loss from discontinued operations of $15.8 million, or $(16.01) in 2015.
Net loss for 2016 was $11.7 million, or $(9.79) per basic and diluted share, against a net loss of $12.8 million, or $(12.97) per basic and diluted share, in 2015.
- Liquidity: As of December 31, 2016, Cleantech Solutions held cash and cash equivalents of $1.5 million compared to $18.8 million at December 31, 2015.
In 2016, the Company used $6.9 million in cash in operations, primarily due to losses for the period. The Company used $10.5 million in cash in investing activities, including $9.0 million in payments for a 30% interest in Shengxin, $2.4 million to purchase of patent technology use rights covering ozone-ultrasonic textile dyeing equipment and $1.2 million for the purchase of equipment. This was partially mitigated by cash inflow by sale of the forged rolled rings and related components segment of $2.2 million.
Key risk factors and potential stock drivers:
For the year ended December 31, 2016, CLNT incurred losses from continuing operations of $1.4 million. Therefore, company’s ability to ramp-up profitability while sustaining its revenue growth would be one of the key stock drivers over the near to medium term.
Cleantech’s ability to maintain its liquidity and financial flexibility to fund its incremental capital requirements. Also, any additional equity raise is exposed to significant dilution risk.
The market for CLNT’ dyeing and finishing equipment is significantly dependent on competiveness of the Chinese textile industry. Therefore, to the extent Chinese textile companies either lose business or potential business to other countries or seek to manufacture in those countries, the market for CLNT’s equipment may decline significantly. Moreover, products are subject to PRC regulations, which may materially adversely affect business.
Stock Performance:
On Friday, May 12th, 2017, CLNT shares closed at $4.21 on an average volume of 1.73 million shares exchanging hands. Market capitalization is $4.4 million. The current RSI is 52.39
At $4.21, shares of CLNT are trading above its 50-day moving average (MA) at $3.61 and above its 200-day MA at $3.54.
The present support and resistance levels for the stock are at $3.78 & $4.45 respectively.
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