IPO Launch: CN Energy Group Seeks $23 Million U.S. IPO

IPOStreet

CN Energy Group (CNEY) intends to raise $22.5 million in an IPO of its ordinary shares, according to an F-1 registration statement.

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Hangzhou, China-based CN Energy was founded to supply biomass products from forestry residues, little fuelwood and wood wastes to customers within its own province and neighboring provinces in northeast China.

Management is led by Chairman and Chief Executive Officer Mr. Kangbin Zheng, who has been with the firm since April 2020 and was previously CEO of Beijing Future Ark Consulting and director for private sector operations in China at the Asian Development Bank.

Below is a brief overview video of how biomass works:

Source: Student Energy

For the six months ended March 31, 2020, three large customers accounted for 39% of the firm's revenues.

The company’s products are used in the following applications:

  • Pharmaceutical manufacturing
  • Industrial manufacturing
  • Water purification
  • Environment protection
  • Food & beverage production

CN Energy has received at least $22 million from investors including Global Clean Energy, Elk International Capital, Sentong Industrial, Xieying Energy, Yunda Industrial and Xinhe Industrial.

The firm competes for customers 'primarily on the basis of activated carbon prices, activated carbon quality and characteristics, transportation costs, customer relationships and reliability of supply.'

All of the firm's sales are to customers located within the PRC.

Selling expenses as a percentage of total revenue have been variable as revenues have fluctuated.

The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was negative (8.2x) in the most recent reporting period.

According to a 2020 market research report by BioEnergy Consult, the biomass market in China has been developing quickly in recent years, with the installed power generation capacity in the country growing from 1.4 gigawatts in 2006 to 14.88 gigawatts in 2017.

This represents a more than tenfold growth rate within a twelve year period.

The majority of biomass in China is located in the eastern region, with the Shandong province on the eastern coast representing 14% of total biomass.

Also, China plans to further increase its use of biomass in energy production up to 15% and 30 gigawatts of power by 2030.

Major competitive or other industry participants include:

  • Fujian Xinsen Carbon Industry
  • Shanxi Xinhua Activated Carbon
  • Ningxia Huahui Activated Carbon Company
  • Shenhua Ningxia Coal Industry Group
  • Xingtai Coal Chemical Co.

Management says its strong R&D relationships and strategic placement of facilities near major supplies of raw materials as well as transportation corridors facilitates transport of its products to customers in East and South China.

CN Energy’s recent financial results can be summarized as follows:

  • Variable topline revenue
  • Uneven gross profit but increasing gross margin
  • Variable operating profit and margin
  • A swing to cash used in operations

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

cnenergypl

Source: Company registration statement

As of March 31, 2020, CN Energy had $1 million in cash and $5.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($1.3 million).

CN Energy intends to raise $22.5 million in gross proceeds from an IPO of its ordinary shares, although the final amount may differ.

It is customary for foreign firms to offer U.S. investors American Depositary Shares representing underlying shares to minimize administrative burden, so the absence of this typical feature is a negative for U.S. investors.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $68.9 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 32.37%.

Management says it will use the net proceeds from the IPO to construct the first phase of a new manufacturing facility in Manzhouli City.

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

The sole listed bookrunner of the IPO is Network 1 Financial Securities.

Commentary

CN Energy is seeking U.S. public capital market funding for the first stage of its construction of a new biomass manufacturing facility.

The company’s financials show a contraction in revenue and gross profit, but a rise in gross margin and continued comprehensive income.

Selling expenses as a percentage of total revenue have been variable; its Selling efficiency rate dropped sharply into negative territory in the most recent reporting period.

The market opportunity for biomass products in China for energy uses is expected to grow substantially in the years ahead.

Network 1 Financial Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (46.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

As to valuation, compared to a basket of publicly held Green & Renewable Energy companies compiled by the NYU Stern School in January 2020 which had an EV / Revenue multiple of 9.94x, CNEY’s proposed EV / Revenue of 6.84 appears reasonable.

However, the firm’s operations were significantly affected in Q1 2020 due to the impact of the Covid19 pandemic.

While China has emerged from the worst of the pandemic’s effects, CNEY’s exposure to production or transportation delays or closures is material.

Given that level of uncertainty, my opinion on the IPO is to AVOID it.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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