On January 11, 2024, Chengdaotong Environmental once again submitted an F-1/A document to the SEC, and almost three years have passed since the first submission of the information. Even after such a long wait, the future of Chengdodong Environmental Protection's listing is still unknown.
After the prospectus was updated for the 14th time, Chengdaotong Environmental Protection (CDTG.US)'s listing in the US was still “bumpy”.
As early as January 15, 2021, Chengdaotong Environmental Protection submitted a prospectus to the SEC to apply for listing on the NASDAQ. However, due to the influence of multiple factors, Chengdaotong Environmental Protection updated its prospectus more than ten times and failed to successfully go public.
On January 11, 2024, Chengdaotong Environmental once again submitted an F-1/A document to the SEC, and almost three years have passed since the first submission of the information. Even after such a long wait, the future of Chengdodong Environmental Protection's listing is still unknown.
“Repeated defeats, repeated losses, repeated battles” is curious. As far as ChengdaoTong Environmental Protection is concerned, why is it so difficult for NASDAQ to knock on the door?
Revenue is rising but it is difficult to withstand profit fluctuations
The Zhitong Finance App learned that Chengdaotong Environmental Protection was founded in 2012. The company mainly generates revenue through the design, development, manufacture, sale, installation, operation and maintenance of sewage treatment systems and provides sewage treatment services. It is a waste treatment company. The company has now built more than 60 rural sewage treatment plants in Fujian, Jiangxi and Liaoning provinces in China, with a total treatment capacity of 3,400 tons.
In 2021, 2022, and the first six months of 2023, Chengdaotong Environmental Protection's revenue was US$235.56,800, US$28.8494 million, and US$154.638 million, respectively, with a steady increase in revenue.
Looking at the breakdown, the company is mainly engaged in two business lines: sewage treatment systems and sewage treatment services.
Among them, for the sewage treatment system business, the company mainly sells complete sewage treatment systems for the rural market, builds rural sewage treatment stations, installs systems, and provides continuous operation and maintenance services for municipal departments and enterprise customers.
The sewage treatment system business is the company's main source of revenue. In recent years, its revenue and share of revenue have continued to grow. In 2021, 2022 and the first half of 2023, the business brought the company revenue of US$2.773 million, US$26.553 million and US$144.45,800, respectively, accounting for 86.06%, 92.04% and 93.42% of revenue.
For sewage treatment services, it mainly provides on-site or local septic tank treatment services for municipal departments, residential and commercial property management companies. Revenue from this business has fluctuated somewhat in recent years. According to prospectus data, during the period, revenue from this business was US$3.2838 million, US$2.2969 million, and US$10.18 million, respectively, accounting for 13.94%, 7.96%, and 6.58% of revenue, which continued to decline. The company explained that this is mainly because the company has shifted its development focus to the operation of sewage treatment systems and invested more resources in the development of its business.
Despite a steady rise in revenue, the company's profitability continued to decline. The company's gross margin has declined from 36.1% in 2021 to 35.5% in 2022. In the first half of 2023, this figure further declined to only 31.2%. In response, the company explained that this was mainly due to increased material and labor costs in the sewage treatment system business. Due to this, the company's net profit performance also continued to fluctuate, amounting to 6.7757 million, 5.7820 million, and 2,034 million US dollars, respectively, during the reporting period.
Upstream and downstream “addictions” are difficult to solve
At the same time, the company is also mired in the “dilemma” of both upstream and downstream suppression.
Among risk factors, the company admits that the company's business largely depends on the success of suppliers. The company relies heavily on a limited number of suppliers, and the loss of any such supplier may damage its business. In 2021 and the first half of 2023, purchases from the largest suppliers accounted for 40.7% and 59.5% of total purchases for the same period, respectively. It should be noted that companies generally do not have long-term agreements or arrangements with suppliers, and the company's suppliers usually provide them with standard components for sewage treatment and integrated sewage treatment equipment, so replacing such suppliers may have a huge negative impact on our performance. If the company is unable to obtain products or product components immediately, its operations may be seriously disrupted, and may be disrupted for a long period of time. This delay could significantly reduce the company's revenue and profitability and hurt its business development.
In addition to reliance on upstream suppliers, Chengdaotong Environmental's major downstream customers are also at risk of high concentration. During the reporting period, the company's customers were mainly local governments, state-owned companies, and residential and commercial property management companies in China. Among them, the company's revenue from its largest customers accounted for 45.4%, 48.5%, and 52.7% of the company's total revenue. The company admits that in the past and in the foreseeable future, one or several customers accounted for a significant portion of the company's total revenue. This is also reflected in the company's repayment rate in recent years. According to the Zhitong Finance App, in the company's sewage treatment system revenue progress bill, the company's repayment rate continued to decline, falling from 96.2% in 2020 to 50.5% in 2022, and even falling to only 26.2% in the first half of 2023. In response, the company said that the liquidity of the business is largely dependent on the payment timing of the company's main customers, and if there are any delays in payment, the company's business and liquidity may be affected.
The industry has broad prospects, but the market competition is particularly fierce
Looking at the industry market, at present, most wastewater treatment plants in China exist in urban areas. In contrast, rural China's population is more scattered, making it difficult to collect sewage for centralized treatment. As a result, the market demand for decentralized rural sewage treatment services and equipment in China continues to grow. According to data from the Future Industry Research Institute, total revenue from decentralized rural sewage treatment services and equipment in China reached RMB 92.5 billion in 2019, growing at a CAGR of 40.3% from 2015 to 2019.
However, according to data from China's Ministry of Environmental Protection and China's Ministry of Finance, as of the end of 2016, only about 22% of registered villages in China had treated rural sewage, and by 2021, this figure was only 28%. It can be seen from this that the rural sewage treatment market is large. According to “The Economist”, the rural sewage treatment market in China will reach about 200 billion yuan by 2030.
Furthermore, the policy side is also supporting the development of the industry. China's 13th Five-Year Plan proposes clean water initiatives to build urban sewage treatment and support facilities, recycle urban reclaimed water, and continuously reduce waste emissions. Furthermore, the 13th Five-Year Plan requires industrial products to be completed by improving product technology, process equipment, and energy efficiency. China's Ministry of Housing and Urban-Rural Development has also set a goal of establishing sewerage and sewage treatment facilities and service systems in 90% of China's villages and towns within 30 years. This will all promote the development of the rural sewage treatment industry.
Although rural sewage treatment is an emerging industry in China, competition in the industry is still fierce. The company's main competitor is a regional company engaged in the construction of rural sewage treatment plants and the provision of operation and maintenance services. Although large companies generally do not enter the rural sewage treatment market due to the difficulties of centralized sewage treatment in rural China, regional companies that compete with them are usually smaller and rely on their relationships with large state-owned companies that outsource rural sewage treatment. Most of the company's competitors have significant competitive advantages, including a longer operating history, a larger and broader customer base, lower cost production, stronger relationships with a wider range of suppliers and customers, higher brand awareness, and greater financial, R&D, marketing, distribution, and other resources than the company. This also causes the company to face multiple risks in the process of gaining access to the market.
Taken together, with multiple risks such as declining profitability, continued upstream and downstream dependency, and intense industry competition, it seems easy to understand why ChengdaoTong's path to environmental protection is not easy.