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Filthy Forty China New Energy – fundraising, contracts, trading update.....BARGEPOLE!

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 16 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

ShareProphets AIM-China Filthy Forty play China New Energy (CNEL) updated the market on trading for FY2016. The company reported a profit at the interim stage and continued to perform well in the second half of 2016 with revenue (subject to audit) expected to be up to about RMB 72 million. There are also contracts announced totalling about RMB 80 million expected to see project completion in Q3 of this year. So all is going swimmingly – except that the company has raised more money. Clearly the profits are not turning into cash. Why?

Taking a closer look at the 2016 interims we see a reported a profit of about RMB 11.5 million on revenues of RMB 45 million (up from RMB 27 million at the previous half-way stage, and as against RMB 62 million at the previous full year). But the balance sheet saw trade and other receivables balloon from RMB 43 million both at the previous FY and H1 stage to a very impressive RMB 98 million.

In other words receivables were up over the period by RMB 55 million, yet reported revenue was just RMB 45 million. Er….

Having reported profits of RMB 11.5 million, the company had net current assets of MINUS RMB 5 million at period end – and that was after having raised RMB 6.6 million from issuance of shares. To be fair, the net current asset position had been far worse at the previous FY but even after raising RMB 6.6 million from dishing out the confetti the company cashflow only saw a net increase of RMB 0.5 million.

So much for a profitable first half of last year, then! Receivables up by more than turnover and (before being rescued by keep-the-lights-on placings) about RMB 6 million to the great central bank in the sky. It’s a bit of a Red Flag festival.

So now we are told that the company continued to perform well. We are not told whether it made a profit – one would rather fancy that the company would be keen to say so if it had got in the black.

We are also told that revenues – subject to audit – rose to about RMB 72 million. Having reported revenues of RMB 45 million in H1 that rather suggests that the company continuing to perform well means that revenues were just RMB 27 million in H2. That’s a bit of a slip on the first half.

And whilst we should always await the assurance of an audit, the revenue figure being qualified as subject to audit suggests that there may be some discussions ahead as to how receivables had gone up by more than turnover during H1. Are the words “revenue recognition” on the agenda?

We shall see.

The good news is those contracts with COFCO Corporation totalling about RMB 81 million, with payments subject to project milestones. Whether that will translate into cash or just an ever-larger pile of receivables remains to be seen.

In Canada we are told that a project has been completed successfully although that the production line “will” produce natural fibre sweeteners. So it sounds as though the plant isn’t yet up and running. Has the full contract been paid up?

In Hungary a previously announced contract under which grateful shareholders in China New saw the company pony up Eur 250,000 (we are now told it was $250,000) to the customer looks to have fallen by the wayside – and as predicted HERE by yours truly the cash is down the toilet. Nice one.

Sub-Saharan-Africa – after all the hype and bluster over deals, contracts, agreements and so on in Ghana, Nigeria, Sierra Leone, Zambia and Zimbabwe all we get is that they remains strong with prospective sales. Oh, so no actual sales yet.

 Finally we are told that there continue to be discussions with “our customers” in Thailand…..but no orders have been confirmed. Hmm: isn’t a customer someone you have sold something to, rather than are talking to?

I know: I’ll start up Deputy Sheriff Ltd, send a letter to the FCA offering my services and then claim that it is a customer of mine. Great.

So with all this success, the company must be dripping in cash right now?

Seemingly not – with the subscription of about £700,000 for more confetti announced (albeit at a bit of a premium) to keep the lights on.

At least the issue of equity was announced together with the update and not half an hour afterwards as before, when the company completed the fastest pump-and-dump in history.

It goes without saying that I still view this stock as a stand-out bargepole, dripping in Red Flags.

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