DSCimage/iStock via Getty Images
A quick overview of CDT Environmental Technology Investment Holdings
CDT Environmental Technology Investment Holdings Limited (CDTG) has applied to raise $12.28 million in an IPO of its common stock, according to an F-1/A registration statement.
The company designs, sells, installs and services wastewater treatment systems in China.
CDTG is a small company and has produced declining revenues in a growing industry, so I’m waiting for the IPO.
Company
CDT, based in Shenzhen, China, was founded to sell complete wastewater treatment systems and provide maintenance to municipalities and urban and rural wastewater companies in China.
Management is headed by Chairman and CEO Mr. Yunwu Li, who has been with the company since 2015 and previously served as General Manager of Fujian Optical Instrument Co.
The company’s main offerings include:
CDT has recorded an investment at fair market value of $8.6 million as of June 30, 2021 from investors including CDT Environmental Technology Holdings Limited, Venture Million Limited, Luo Jia Holdings Limited, Wisdom Latch Limited and Juncheng International Corporation.
CDT – Customer Acquisition
The company has established direct sales and marketing networks in various major cities and rural areas in China.
CDT competes for contracts at the municipal or provincial level for its proprietary systems and technologies.
Management intends to expand its rural wastewater treatment commercialization efforts in Fujian and Zhejiang provinces.
Selling expenses as a percentage of total revenue have increased as revenue has decreased, as shown in the numbers below:
|
Sale |
Expenses vs income |
|
Period |
Percentage |
|
Six months. Completed June 30, 2021 |
2.7% |
|
2020 |
0.8% |
|
2019 |
0.5% |
(Source)
The sales effectiveness rate, defined as the number of dollars of incremental new revenue generated per dollar of sales spend, increased to 3.9x during the most recent reporting period, as shown in the chart below. – below:
|
Sale |
Efficiency rate |
|
Period |
Several |
|
Six months. Completed June 30, 2021 |
3.9 |
|
2020 |
-131.9 |
(Source)
CDT market and competition
According to a 2018 market research report According to bcc Research, China’s wastewater treatment market was estimated at $42.1 billion in 2017 and is expected to reach $58.2 billion by 2022.
This represents a projected CAGR of 6.7% from 2017 to 2022.
According to a report by Mordor Intelligence, the main drivers of this expected growth are growing demand from the industrial sector and increasing regulation of wastewater treatment.
Additionally, increasing water scarcity and the potential for climate change that could strain water and wastewater treatment systems will likely increase demand pressures.
Major competitors or other industry participants include:
Financial performance of CDT Environmental Technology Investment Holdings Limited
The company’s recent financial results can be summarized as follows:
-
Contract turnover turnover
-
Reduced gross profit and fluctuating gross margin
-
Unequal operating losses
-
Fluctuating cash used in operations
Below are the relevant financial results from the company’s registration statement:
|
Total revenue |
||
|
Period |
Total revenue |
% deviation from before |
|
Six months. Completed June 30, 2021 |
$3,522,751 |
11.8% |
|
2020 |
$8,911,108 |
-52.4% |
|
2019 |
$18,732,266 |
|
|
Gross profit (loss) |
||
|
Period |
Gross profit (loss) |
% deviation from before |
|
Six months. Completed June 30, 2021 |
$1,481,989 |
33.8% |
|
2020 |
$3,927,951 |
-43.8% |
|
2019 |
$6,993,869 |
|
|
Gross margin |
||
|
Period |
Gross margin |
|
|
Six months. Completed June 30, 2021 |
42.07% |
|
|
2020 |
44.08% |
|
|
2019 |
37.34% |
|
|
Operating profit (loss) |
||
|
Period |
Operating profit (loss) |
Operating margin |
|
Six months. Completed June 30, 2021 |
($157,386) |
-4.5% |
|
2020 |
$(1,640,587) |
-18.4% |
|
2019 |
$3,340,899 |
17.8% |
|
Net profit (net loss) |
||
|
Period |
Net profit (net loss) |
The net margin |
|
Six months. Completed June 30, 2021 |
($95,962) |
-2.7% |
|
2020 |
$(1,528,273) |
-43.4% |
|
2019 |
$2,496,129 |
70.9% |
|
Operating cash flow |
||
|
Period |
Operating cash flow |
|
|
Six months. Completed June 30, 2021 |
$(831,688) |
|
|
2020 |
($568,854) |
|
|
2019 |
($2,319,179) |
|
(Source)
As of June 30, 2021, CDT had $264,070 in cash and $10.9 million in total liabilities.
Free cash flow for the twelve months ended June 30, 2021 was negative ($1.3 million).
CDT Environmental Technology Investment Holdings Limited IPO Details
CDT intends to raise $12.28 million in gross proceeds from an IPO of its common stock, offering approximately 3.1 million shares at a proposed price of $4.00 per share.
No existing shareholders have expressed interest in purchasing shares at the IPO price.
Assuming a successful IPO, the company’s enterprise value at the time of the IPO would be approximately $38.1 million, excluding the effects of underwriter over-allotment options.
The float ratio on outstanding shares (excluding subscriber over-allotments) will be approximately 25.02%. A figure below 10% is generally considered a “low float” stock that can be subject to significant price volatility.
Management says it will use the net proceeds from the IPO as follows:
approximately 45% for working capital purposes for rural wastewater treatment, including to build our wastewater treatment equipment;
approximately 35% for the implementation of new systems and services and possible mergers and acquisitions of subsidiaries, although no definitive merger or acquisition targets have been identified;
about 15% for research and development; and
the rest for sales and marketing, additional working capital and general business purposes, including increasing our cash flow.
(Source)
The presentation by management of the company’s roadshow is not available.
In terms of ongoing legal proceedings, the company has been the subject of a number of disclosed lawsuits which have been closed, with one case remaining with a potential loss of $150,000.
The sole listed bookrunner of the IPO is WestPark Capital.
Evaluation metrics for CDT
Below is a table of relevant capitalization and valuation figures for the company:
|
Measure [TTM] |
Rising |
|
Market capitalization at IPO |
$49,080,000 |
|
Enterprise value |
$38,115,930 |
|
Price / Sales |
5.29 |
|
EV / Turnover |
4.11 |
|
EV / EBITDA |
-27.00 |
|
Earnings per share |
-$0.09 |
|
Operating margin |
-15.21% |
|
The net margin |
-12.74% |
|
Free float to outstanding shares |
25.02% |
|
Average Proposed IPO Price Per Share |
$4.00 |
|
Net free cash flow |
-$1,255,470 |
|
Free cash flow yield per share |
-2.56% |
|
Revenue growth rate |
11.78% |
(Source)
CDT IPO Commentary
CDTG is seeking US investment capital to fund its rural wastewater treatment expansion plans and other business growth initiatives.
The company’s finances produced significantly lower net income, less gross profit and variable gross margin, fluctuating operating losses, and uneven cash used in operations.
Free cash flow for the twelve months ended June 30, 2021 was negative ($1.3 million).
Selling expenses as a percentage of total revenue increased while revenue decreased; its sales effectiveness rate has moved into positive numbers over the last reporting period.
The company currently plans to pay no dividends on its shares and anticipates that any future earnings will likely be reinvested in the company to fund its growth plans.
The market opportunity to provide wastewater treatment services and products in China is large but dominated by large companies.
WestPark Capital is the only underwriter and the only IPO conducted by the company in the last 12 months has generated a negative return (81.3%) since its IPO. This is an underperformance for all major underwriters over the period.
The main risks to the company’s outlook are its small size, shrinking revenues and its commercial focus on rural areas.
Given the decline in revenue and the small size of the company, I am waiting for the IPO.
Expected IPO pricing date: to be announced.
