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By Gary Newman | Tuesday 10 July 2018
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.
Zibao Metals (ZBO) is a company which most of you will never have heard of before, but could well be on the pump and dump crews lists again very soon after the latest news.
Trading in the company's shares is extremely illiquid most of the time, and I suspect that some will now be trapped in here and will be looking to offload their shares onto any mug punter silly enough to buy them. This Hong Kong-based company mainly trades non-ferrous metals, which it sources from around the world and sells on to customers in China, but its whole business model now looks under threat.
The company has just announced that the series of new regulations which the Chinese government has been implementing this year is likely to have a significant impact on its business. The Ministry of Ecology and Environment has now banned the importation of 32 types of scrap material, including plastics, and further much tighter regulation is now in place for other scrap material not explicitly banned already, including scrap metal from overseas.
Zibao was already operating on very tight margins, with HKD479 million of revenue for H1 2017 – the last set of accounts published – resulting in a gross profit of just HKD3.8 million. After admin expenses of nearly HKD3.3 million (roughly £320,000) that resulted in a net profit of HKD483,000, or £46,000 - and at that time the company had roughly £300,000 in the bank.
Given the fact that the company was making such a small profit – albeit that a net profit for a tiny AIM company certainly isn’t the norm – the changes in regulation are likely to have a significant impact on it. The company has stated that it will be cutting costs, but I would be amazed if it was able to continue making a profit and will likely start to eat into its already very limited cash reserves.
The company had already been struggling prior to this news in a very competitive market and had seen its share price on a steady downwards spiral other than the occasional brief upwards spike along the way. The shares are now 1.25p on the ask, with a massive 66.7% spread and a bid price of 0.75p. The majority of shares are held by a handful of investors, including founder Joe Zhou and a couple of other companies that he controls, which is the main reason for the illiquidity here.
Given the market cap is now only around £1.2 million and the current situation that the company finds itself in, it is hard to see how it could raise any further funds, and any significant investment by Zhou would likely put him in a position where he owned enough stock that he had to take it private.
I’ll be interested to see how long this company is able to survive for and it may be one of those that hangs around for a year or two before finally delisting – in the absence of anything to turn the business around. I would avoid this one like the plague, as the wide spread means buying will instantly see you sat on a large loss, and the illiquidity will make it almost impossible to sell anyway. So if you see it being pumped on the bulletin boards and social media, don’t fall for it as more than likely you will regret ever hearing of this company.
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