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Cleantech Solutions International Inc (NASDAQ: CLNT) Remains Undervalued After Earnings

Cleantech Solutions International Inc (NASDAQ: CLNT) Remains Undervalued After Earnings
Written by
Jarrod Wesson
Published on
April 27, 2017
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Cleantech Solutions International Inc (NASDAQ: CLNT) did it again this week. As we claimed in a previous article, which we encourage you to read, the company is an undervalued play. If the new financial statements are correct, then the company is trading as of April 26, 2017 at 0.07x its book value. However, there seems to be a small group of savvy, contrarian and maybe elite traders buying at these prices. The group pushed the share price from $3.50 to $4.50 on April 25, 2017; approximately 30% jump. Hence, we believe that a follow-up was necessary. Take a look at the chart spike:SourceWhat's going on?In our previous article, we claimed that the company was vastly undervalued by the market. The share price was, at that time, at the level of $3.50, but we assessed the fundamental valuation of the company, and found out that its shares should be exchanged for much more:

  • "The total cash per share of the company is $9 per share
  • The accounts receivables is about $11 per share
  • The book value per share is $59 per share
On April 12, 2017, the share price was $5.41 per share, which is 60% of the amount of cash. This way of valuing the company is called liquidation method. It means that you could buy the company for 60% of the total amount of cash holding in the balance sheet and obtain the cash." Source

A few days after our article got published, the share price jumped, in only one day, from $3.50 to almost $5.00, largely benefiting our subscribers. However, the fact is that even at the current price levels, the company is still undervalued by the market. Shareholders keep believing that if the company is Chinese, it should be ignored. Hence, the same initial thesis included in our previous article remains. If the company is not able to obtain more financing from the financial markets, the best solution may be a go-private transaction:

"In the United States, there is a large amount of investors, who do not trust the way that Chinese companies do their accounting. That is the reason that the share price of this company is trading at these levels. In this kind of situation, we have in the past seen Board of Directors decide on a buyout and go private. While a go-private transaction is not a sure thing with CLNT, it is likely if shares remain depressed." Source

Do the numbers released recently change the situation?On April 17, 2016, the company released its financial results for the year-end 2016. The CEO tried to explain that the company was in a process of transition and the new outlook may be positive for the Chinese company:

"This was a year of transition for Cleantech Solutions. With our forged rolled rings and related components and petroleum and chemical equipment segments continuing to perform poorly, we decided the best course of action was to exit these two segments. Our core dyeing machine business felt the impact of China's difficult economic environment.We are now focused on improving the long-term outlook for the dyeing equipment business by developing next generation dyeing and finishing equipment based on our recently acquired ozone-ultrasonic patent technology." Source

The most relevant financial figures were the revenue, which was $17.4 million. This represents a decrease by 40.1%, compared to the previous year, but it is vastly discounted in the current share price. The company said that the decline was due to an anticipated slowdown in shipments of low-emission airflow dyeing machines, provoked by lack of credit of customers and the fact that they also acquired new models and do not require additional equipment for the moment.On the part of the expenses, the company saw that the operating expenses increased by 77.4% to $3.9 million, explained by "higher bad debt expense, higher professional fees in the form of stock-based compensation and an increase in research and development expenses". Again, this news did not surprise anybody, as the share price did not decline when these numbers were released.The financial condition remains as follows:

  • $1.5 million in cash or $1.15 per share.
  • $13.9 million in accounts receivable or $10.69 per share
  • $21.5 million in working capital or $16.41 per share.

To sum up, the revenues declined in 2016 and the expenses increased. The company is having a bad time coping with a crisis in the sector in China. But, the fundamental value per share of the balance sheet is absurd. We still believe that the current share valuation does not make any sense.ConclusionThe market got to know the financial figures released for Q4 2016 and the year-end annual results. The results were bad, but widely expected, so the share price did not actually react. We keep seeing massive undervaluation of this stock, and it seems that some traders finally realized it, as the share price jumped as much as 30% very recently. To cut a long story short, follow this name like the other savvy individuals as we expect more developments as 2017 progresses. We will be updating our subscribers as soon as we know more. For the latest updates on CLNT, sign up below!Disclosure: We have no position in CLNT and have not been compensated for this article.

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