China's Version of 'Clean Coal'

Written By Jason Williams

Posted July 15, 2014

When you invest in a company, what really are you investing in? Its products? Yes, naturally. Its management? Indeed. Anything else?

What about its name and corporate logo? In some cases, perhaps even a cute and cuddly mascot? Although these characteristics and attributes are not the first things investors consider, they do contribute a good deal to a company’s success, and as a consequence, to investment returns.

In fact, corporate image is so important to a business’ success that untold billions of dollars are spent every year on brand image crafting. Image enhancement goes a long way toward enhancing business performance.

This could be the reason why China-based coal producer SinoCoking & Coke Chemical Industries Inc. (NASDAQ: SCOK) is changing its name. Its stock has been on a horrendous downward slide since the company started trading publicly back in mid-2010, falling from over $50 then to under $1 last month.

Then something marvellous happened. Someone in upper management had a stroke of genius, an epiphany of sorts. The company changed its name to “Clean Synthetic Technologies.”

Lo and behold, the stock jumps 100% from $1 in mid-June to $2 this week.

Well, there is a little more to it than simply the name change. In fact, the new name reflects the company’s new attitude toward its coal operations, a new commitment to responsible environmental stewardship.

Chairman and CEO Jianhua Lu this week revealed that the company is embracing a whole new mandate to “help our nation alleviate the pressing air pollution and global warming problems we face.”

That’s going to take a lot more than just a name change to accomplish. Let’s take a peek under the hood and see how they intend to execute their transformation.

Two Blows to its Bottom Line

SinoCoking has had a few misfortunes to contend with. As a producer of coal-related products including raw coal, washed coal, medium or mid-coal, coal slurries, coke, coal tar, and crude benzol, its revenues are tightly bound to the market price of coal, which has been falling in recent years.

The company had done pretty well riding the coal price up the chart from $45 per short ton in mid-2009 to $80 a ton by the end of 2010, which explains the company’s stock’s meteoric rise from $15 to $50 within a month of its mid-2010 IPO.

But as the coal price started its descent from $80 a ton in 2011 to $50 by mid-2013, the company’s income did the same. SinoCoking’s net income steadily declined from U.S. $39.9 million in 2011, to $12.5 million in 2012, to a mere $1.0 million in 2013. Investors punished the company’s stock, plunging it to under $1 a share by May and June of this year.

Another misfortune is the company’s location in China, one of the most polluted nations in the world. In an effort to clean up the country’s notorious smog, Chinese regulators have been steadily increasing pollution control standards and prioritizing clean energy alternatives. SinoCoking has thus not only been receiving less money for its coal but has been selling less of it to boot.

Well, you know what they say… “If you can’t beat them, join them.” Seeing as clean energy solutions are the wave of the future, SinoCoking has decided to embrace clean energy technology and evolve its business into a company with a future.

Cleaning Up Its Act

“SinoCoking Coal and Coke Chemical Industries [stock] surged Monday after the company announced it would shift its focus to large-scale production of clean energy, such as clean-burning synthetic gas,” TheStreet investment magazine explained the stock’s recent move.

The company is building a new “green facility” to trap carbon dioxide emissions from coal burning furnaces and convert them into synthetic gas, the aptly named “syngas”, which has multiple beneficial uses.

Syngas can be used to power electric turbines, qualifying the electricity output as “clean”. It can also be used in numerous types of fertilizers, solvents and a multitude of industrial products.

When the new production facility becomes operational in Q4 of this year, it should produce as much as 25,000 cubic meters of syngas each hour, making it one of China’s highest producing syngas plants.

And if you’re going to change your act, you’re going to need to change your name. In the spirit of the company’s new commitment to providing cleaner energy products, it was only fitting to adopt a new name and image, “Clean Synthetic Technologies”.

Will This Help the Bottom Line?

Certainly the new image will help the company make the transition to an alternative clean energy producer. But will its new syngas plant help its operations make the transition to profitability?

USA Today reports that “Asia IRPR, the New York-based firm that represents SinoCoking, says the company does not yet have an estimate for what the revenue will be from the synthetic-gas operation.” It is unclear at this point just how much of the company will be devoted to syngas production.

While the company is not currently evaluated by brokers and analysts, TheStreet ran its own evaluation of the company’s prospects, rating the stock as a “hold” for the following reasons:

• Net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 46.8% when compared to the same quarter one year prior, rising from $0.50 million to $0.74 million.

• The current debt-to-equity ratio, 0.38, is low and is below the industry average, implying that there has been successful management of debt levels.

• The company’s quick ratio of 1.68 demonstrates its ability to cover short-term liquidity needs.

• “Its decline in revenue underperformed the industry average. Revenues fell by 20.9% from the same quarter a year ago. However, the declining revenue has not hurt the company’s bottom line, with increasing earnings per share.”

On this note, the $40.34 million nano-cap managed to generate an impressive EBITDA of $7.15 million, or some 17.7% of its market cap. Despite quarterly revenues being down year-over-year, quarterly earnings growth yoy increased by 46.6%.

• “The company’s current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, the company’s return on equity significantly trails that of both the industry average and the S&P 500.”

On that note, returns on assets and equity came in at 1.85% and 0.66% respectively. Yet even after its recent run up in price, SCOK’s stock may still be attractively priced at 0.59 times sales and 0.25 times book value.

While the company’s declines in performance may have stabilized and its stock price still seems undervalued, it may be a little early to determine whether to jump in until its new syngas plant is up and running and investors are given a clearer picture of this new revenue stream’s impact on the business overall.

But the company has at least spruced up its image as a modern clean energy contender. All we need to see now is some follow-through on its new intentions.

Joseph Cafariello

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