CDT Environmental Technology Stock: U.S. IPO For Rural Focus (Pending:CDTG)

A Quick Take On CDT Environmental Technology Investment Holdings

CDT Environmental Technology Investment Holdings Limited (CDTG) has filed to raise $12.28 million in an IPO of its ordinary shares, according to an F-1/A registration statement.

The firm designs, sells, installs, and maintains sewage treatment systems in China.

CDTG is a tiny firm and has produced declining revenue in a growing industry, so I'm on Hold for the IPO.

Company

Shenzhen, China-based CDT was founded to sell complete sewage treatment systems and provide maintenance for urban and rural wastewater municipalities and enterprises in China.

Management is headed by Chairman and CEO Mr. Yunwu Li, who has been with the firm since 2015 and was previously general manager of Fujian Optical Instrument Co.

The company’s primary offerings include:

CDT has booked fair market value investment 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 bids on contracts at the city or provincial level for its proprietary systems and technologies.

Management intends to expand its rural sewage treatment marketing efforts in the Fujian and Zhejiang provinces.

Selling expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate:

(Source)

The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, increased to 3.9x in the most recent reporting period, as shown in the table below:

(Source)

CDT’s Market & Competition

According to a 2018 market research report by bcc Research, the Chinese market for wastewater treatment was an estimated $42.1 billion in 2017 and is forecast to reach $58.2 billion by 2022.

This represents a forecast CAGR of 6.7% from 2017 to 2022.

The main drivers for this expected growth are increasing demand from the industrial sector and growing regulations for wastewater treatment, according to a Mordor Intelligence report.

Also, a growing scarcity of water and the potential for climate change that may stress water and wastewater treatment systems will likely add to demand pressures.

Major competitive or other industry participants include:

CDT Environmental Technology Investment Holdings Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• Contracting top line revenue

• Reduced gross profit and variable gross margin

• Uneven operating losses

• Fluctuating cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

(Source)

As of June 30, 2021, CDT had $264,070 in cash and $10.9 million in total liabilities.

Free cash flow during 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 ordinary shares, offering approximately 3.1 million shares at a proposed price of $4.00 per share.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $38.1 million, excluding the effects of underwriter overallotment options.

The float to outstanding shares ratio (excluding underwriter overallotments) will be approximately 25.02%. A figure under 10% is generally considered a ‘low float’ stock which 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 sewage treatment, including to build our sewage treatment equipment;

approximately 35% for implementation of new systems and services and potential mergers and acquisitions of subsidiaries, although no definitive merger or acquisition targets have been identified;

approximately 15% for research and development; and

the remainder for sales and marketing, additional working capital and general corporate purposes, including increasing our liquidity.

(Source)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, the firm has been subject to a number of disclosed legal actions that were closed, with one case remaining at a potential loss of $150,000.

The sole listed bookrunner of the IPO is WestPark Capital.

Valuation Metrics For CDT

Below is a table of relevant capitalization and valuation figures for the company:

(Source)

Commentary About CDT’s IPO

CDTG is seeking U.S. investment capital to fund its rural sewage treatment expansion plans and other corporate growth initiatives.

The company’s financials have produced sharply lower top line revenue, 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 have risen as revenue has declined; its Selling efficiency rate swung to a positive figure in the most recent reporting period.

The firm currently plans to pay no dividend on its shares and anticipates that any future earnings will likely be reinvested back into the company to fund its growth plans.

The market opportunity for providing sewage treatment services and products in China is large but dominated by large companies.

WestPark Capital is the sole underwriter and the only IPO led by the firm over the last 12-month period has generated a return of negative (81.3%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are its tiny size, contracting revenue, and business focus switch to rural areas.

Given the company’s declining revenue and small size, I'm on Hold for the IPO.

Expected IPO Pricing Date: To be announced.

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