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Trump, China and China Recycling Energy Corp (NASDAQ:CREG): How It All Went Down

Trump, China and China Recycling Energy Corp (NASDAQ:CREG): How It All Went Down
Written by
Jim Bloom
Published on
November 15, 2017
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Have you seen what has happened to the share price of China Recycling Energy Corp (OTCMKTS:CREG)?Any keen trader must have spotted the surge in prices that has taken part within this week.Even more amazing has been the commensurate jump in the traded volumes which have risen to hit nearly four million shares during periods of highs this week as can be seen in the chart below: CREG Daily ChartA lot of theories have since been brought forth as to what drove the company’s price up; was there a catalyst behind the price jump or did other factors exogenous to the company’s fundamentals play a role of such high magnitude?If such questions have been on your mind, we’ve got you covered.We have since decided to go back and analyze CREG’s fundamentals and plans in a bid to find out what drivers play a role in their value creation and to what level, in turn, any of these drivers may have impacted their share price over the last ten days. Moreover, we will also, in a section specific to this article, assess the geopolitical environment, which we believe may be a contributor to the price surge, and its role of this stock.After all is done, a conclusion based on these will be drawn and we will finally advice investors on whether a sale of the shares, at their current price, would be prudent and if not, what move would be best for them.With that, here is a basic introduction to the company for the sake of first time readers.The Transition to CREGCREG was incorporated on May, 1980 as Boulder Brewing Company with their headquarters in Colorado. In September 2001, they moved headquarters to Nevada and had several name changes until March 2007 when they settled for China Recycling Energy Corporation.Currently, the company, through its subsidiaries, provides energy saving solutions and services such as selling and leasing energy saving systems and equipment to customers, financial leasing, project investment among others.Their main income-generating activities have been tied to leasing, more specifically sales type leases.CREG: Operating EnvironmentCREG currently engages in the leasing sector, a sector which has been currently been valued at over $210 billion and expected to grow annually at 3%.Given the above, leaps within the company in the near future aren’t expected to substantially deviate from the numbers above. The projects they undertake would have to be quite significant to warrant leaps in excess of over 10% growth in the company thus necessitate a high share price movement.This hasn’t been the case.Two main projects took place during the 2016/17 that had a significant influence on the operations of CREG.First, through their subsidiary Erdos TCH they leased power and steam generating systems for recycling waste heat from metal refining to Erdos for a 20-year term. Second, they entered into asset purchase agreements that would see them make significant losses ($3.24 million in total) over this period yet having not collected the full amount during the term. Information on other projects can be accessed here.Financial AnalysisDespite the company making profits of over $279,679 over 1Q2017, the figure is quite small compared to the $2.2 million that they made during a similar period last year. This figure was attributable to the lower incomes made this year with the figure falling by over $1.5 million to close the quarter at $2.2 million.The period also saw them have negative operating cash flows of over $1.1 million from an over $24 million cash inflow last period and despite other numbers such as shareholder equity being quite strong, such declining fundamentals are not enough to drive value of the company as high as has been seen in their share price surge.This only goes to show that the fundamentals which are expected to drive the share price do not seem to be the main drivers in this case. As such, other options need to be assessed before concluding.The Geopolitical EnvironmentThe China-US relationship has been on the rocks in the past especially with the transition to the new political regime. Pressure from the White House to ‘bring jobs back from China’ under the slogan of ‘making America great again’ have done their fair share of rounds both within the US and global media.This, according to analysts, threatened the relationship between the two governments especially given that China has supposedly become the go-to place for subsidized production with some of the largest corporates within the US choosing to move their production wings to China.It therefore comes as no surprise that the most recent trip by the US president to Asia would have serious ramifications on the above stated relationship especially given that he has been quite vociferous about China in particular.This did not happen.The president’s soft tone and failure to point out his views as he has done in the past may have sent a different message to the market; bringing us to the second reason why the prices may have shot up.We believe that due to the softening of the hardline position that has initially been taken by the USA, market players must have come to believe that CREG would somehow benefit from this current state of affairs. Players therefore must have bought up the stock in a bid to jump on the bandwagon and ensure they would be the first to benefit from a price surge.Sadly, if market corrections happen, investors may once again have been part of ‘the Enron ride’ and this will definitely not be a pretty sight.Our ConclusionFrom our analysis, it would be safe to conclude that CREG’s price has been affected more by market sentiments rather than a fundamentals-driven catalyst.This doesn’t mean that their fundamentals are weak, rather despite being strong have been declining over the recent past. Their operating environment has also been quite consistent and no change in laws that would warrant such a high valuation has in turn occurred.Upon this backdrop, we have concluded that the surge in prices may not hold in the short run as a reversal is imminent. However, a lot may change going forward and cause prices to further rise. In this case, only investors with a long-term investment horizon would be advised to hold this stock in their portfolio.ConclusionCREG is by all means an interesting company, strong fundamentals coupled with operations in a growing sector. However, given their declining operations as can be seen in their financials, the above fundamentals would mainly have an impact on the long-term operations of the company. As such, CREG could be an excellent play for investors with a long-term investment horizon, otherwise we recommend sitting on the sidelines.We will be updating our subscribers as soon as we know more. For the latest updates on CREG, sign up below!Disclosure: We have no position in CREG and have not been compensated for this article.

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