Huadi International Group - HUDI
Chinese Steel
Much of the chatter in the financial press of late has been regarding the expected coming slowdown due to tightening monetary policies around the world and what’s going to be affected the most, with some special attention being paid to the world’s steel industry. Steel in general, and Chinese steel in particular, are each expected to suffer in the coming months as consumers appear to be cutting back on cars and other stuff that deploy lots of steel. A few headlines.
Earlier today the world steel association came out with a press release showing a 3% year over year worldwide production decrease for the month of August; while China was up 0.5% for the month, they are still down 5.7% for the year, worse than all but 2 of the other top 10 steel producing countries.
https://worldsteel.org/media-centre/press-releases/2022/august-2022-crude-steel-production/
While there are plenty of ways to play the slowdown through US companies, until recently there hasn’t really been much of a way for US investors looking to play anything in the Chinese steel sector: ZK International Group (ZKIN) has been around a few years, but is a money-losing penny stock with maybe $100M in annual revenues and a current $25M market cap. Not a great choice. Thanks to the folks over at Craft Capital Management and R.F. Lafferty & Co., there is now a slightly larger alternative.
Huadi International Group (HUDI - $26.31)
Shares Outstanding: 13.2M
According to their prospectus and filings, HUDI is a manufacturer and supplier of seamless steel tubes and solid steel bars. About 66% of their revenues come from Chinese companies with another 14% going to India, 11% to the USA, and the rest to other parts of the world. 31% of their product is used by the oil & gas industry, 17% by electricity, 24% automotive, and the rest among a variety of industries. Revenues for the year ending September 30th 2021 were $67M, up from $57M during COVID 2020, and slightly up from $65M in 2019. While slightly profitable, that has been declining in each of the years mentioned. So overall, nothing remarkable.
HUDI came public at the beginning of 2021 in a 3.125M share offering done at $8. The stock immediately traded down and for the next 10 months traded down to the $3 range before staging a miraculous rally in October which saw an explosion of volume and a 10x increase in the company’s stock price. All on no news, and somewhat amazingly, though it has bounced around a bunch, it has held onto those gains. Now that is remarkable.
Family owned – The chairman and founder of the company is Di Wang, and his brother Huisen Wang is the CEO. His son Jueqin Wang is president of Huadi Steel and sits on the board of directors. Combined, they own 10M shares of stock, or pretty much everything that existed prior to going public.
Related party chicanery – One curious aspect of their 2021 “audited” financials was the rather large spike in receivables from $13.6M to $21.3M plus a $2M spike in “related party” receivables from $1.9M to $4.0M. That’s a $10M increase or about 70% on an 18% increase in revenues, and all without any increase in reserves for bad debt. Pretty much the entire jump and then some in related party receivables comes from Yiyu Wang, daughter(?) of the founder, who runs something called Taizhou Huadi Material Technology Co., and saw their receivables balance jump from $0 to $2.543M year over year. Advances to suppliers was also on the move year over year, rising from $1M to $4M, while related party advances rose to $5.5M. The founder’s son runs something called Taizhou Huadi Industrial Co. (THIC) which has been the beneficiary of much of these expenditures and credit. Interestingly, though Taizhou Huadi Industrial Co. still has over $5.5M in advances and owes $1.4M in receivables to the company, though they did not sell any materials to THIC in 2021, meaning the receivables balance is over a year old at least.
Auditors – TPS Thayer of Sugar Land, TX, is their current auditor, replacing Briggs & Veselka Co. in 2021.
Short interest and institutional ownership – according to the Nasdaq.com web site https://www.nasdaq.com/market-activity/stocks/hudi/short-interest, there is virtually no short interest in the stock. Back in October 2021 when it initially spiked up to $30 there was maybe 680k shares short, but today that sits at 8,860 total shares. There is also basically zero institutional ownership of the stock, with only 36,162 shares supposedly held by half a dozen institutions. So where is all the stock?
No interim results – Leading up to their IPO the company played the part of good corporate citizens. They filed their initial F-1 in September 2020 followed by a few amendments and ultimately their prospectus on January 22nd, 2021. On March 30th we got their annual report, followed by an August 26th 2021 filing for interim results for the 6 month period ending March 31st 2021. On February 2nd 2022 the company filed an annual report 20-F for their year ended September 30th 2021, and that’s the last time the company updated their financials.
Differing financials – the company filed an annual report 20-F for the year ended September 30th, 2021, where revenues were reported to be $67M. In this amended for 20-F filed a few months later at the insistence of the SEC which dinged them for not providing adequate investor disclosures regarding the perils of investing in a holding company with zero actual operations, revenues are now $3M higher in both 2021 and 2020.
Company transfers – When a company goes back to the well for more money they’re typically required to file some updated financial statements, but not these folks. On June 28th 2022 they filed to raise $300M through a variety of securities, but no financials (or underwriters) were included. About the only mention of a financial transaction occurs when they mention that after their IPO they sent $11M of it to their Hong Kong subsidiary and another $10M of it to their PRC operating entity.
Out-date corporate web site – the company maintains a web site http://ir.huadi.cc/index.html apparently only for the purpose of gaining a US-based listing. In the press release section, they congratulate themselves on January 12th 2021 on the launch of their website (4 different times) followed by news of a successful IPO, a couple of contracts, financial results for 2020, and then nothing new since April 2021.
These structures just have to be stopped. The Cayman public company that has a contractual relationship with the BVI holding company which has another relationship with the Hong Kong SAR company which knows some people in the PRC who actually happen to own some stakes in Huadi Steel Group; these layers have just got to stop. If you were to put a US Steel multiple on their 20 cents in 2021 earnings, you would get a $1 stock. Who owns and how the stock got to its current $26 price is something of a mystery.