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Filthy Forty Red Flags at Night – China New Energy quacks away and to waddle from AIM?

By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 18 December 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.

Last Night at 4.39pm – after hours at no-one-is-watching o’clock, ShareProphets AIM-China Filthy Forty member (one of just seven remaining) China New Energy (CNEL) issued a Trading Update. Except the meat of the dish was not about the company’s trading, it was about trading in its shares. We are told the Company is currently considering and assessing all the options available for fund raising in other stock exchanges. Aha - it is voluntary execution ahoy!

The company tells us that:

The Board believes that the current share price does not reflect the underlying value of the Company, and such undervaluation is limiting the Company's ability to raise funds in the equity market to expand the business in this growing market sector.

You might have a spot of sympathy for that if it were not for the fact that China New Energy was conducting a selective buyback of its shares in January. If the company wants to raise cash, why was it doing a share buyback? That, on its own, is a massive red flag which leaves the whole of yesterday's out-or-hours RNS open to question (and ridicule). The Chairman tells us:

I am very pleased with the continued performance of the Company and that 2018 will be our third consecutive profitable year. The outlook for 2019 is for continued growth…..

Well, as we all know, profit is a matter of opinion. FY16 saw a profit (on paper, at least) of around £400,000 but the audit statement told us that the company was partially relying on project payments in advance from customers and delaying payment to suppliers… and looking at the company’s receivables we see that of c. RMB 130 million of current trade receivables, c. RMB 80 million is given over in allowances for impairment, and of the c. RMB 50 million held as unimpaired but overdue receivables RMB 28 million is more than 60 days overdue, a further 10 million is over a year late and a couple of million are over 2 years overdue. But they are not impaired. And amongst related party transactions we were told of RMB 10,595,000 of non-trade receivables due from a company under the control of two directors of the group, up from RMB 8 million the previous year.

FY17 saw significantly increased revenues and profits but more warnings from the auditor regarding Going Concern and recoverability of trade receivables, yet despite the warning the company proceeded with its selective share buy-back! And despite reporting a RMB 35 million profit, the cashflow statement records Net Cash used by Operating Activities as an OUTFLOW of RMB 5 million. As I said: profit is a matter of opinion! And why, if China New is doing so well, did it record bank loans costing RMB 666,000? And now we are told that the company is evaluating a listing elsewhere and a decision will be made in Q1 2019 – which, very happily, means it won’t have to get its FY18 numbers out whilst on AIM. Now there’s a thing.


….. A key goal for 2019 is to actively address our share price, so the Company can use its equity to take advantage of the opportunities in this growing renewable energy market

Er, right. So the company wants to tell us that the market is getting the share price wrong. No red flags there, then! Of course, we’ve seen this all before amongst other filthy forty companies: mega-profits but cash draining away, questionable receivables, related party transactions and so on. In some cases those companies disappeared because the Nomad walked. In other cases, the company voluntarily delisted (often alongside promises to gain a listing elsewhere which came to nothing). And now - surprise, surprise - China New seems to be saying that AIM undervalues its shares so it is taking its ball home ahead of having to release its FY18 numbers.

Well, if it looks like a duck and walks like a duck and talks like a duck…… The only question for me is whether China New disappears into the sunset before or after fellow filthy forty play Walcom (WALG), to leave our once proud index of forty sitting on just 5 remaining AIM-listed outfits. For the avoidance of any doubt, SELL!!

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