NaaS Technology Inc. - NAAS
Changing past revenues for a brighter future
If nothing else, Bain Capital alums understand what the market likes to hear, and their new Bain-pedigreed CFO apparently didn’t like what he was hearing. I guess when some parts of financial reporting become too much of a distraction, it makes a certain sense to completely eliminate them and pretend that it just didn’t happen. In some circles they call it a do-over. Well, among other things, the folks over at NAAS just eliminated disclosing those pesky and unappealing “incentive fees” they pay out to subscribers and appear to be hoping that it’s early enough in the game that nobody is going to notice. Now, if they could only explain how in a recent restatement they also somehow doubled their prior period revenues…
How to double your revenues without even trying – Since this is a Chinese company that is immune to most of the more stringent filing requirements (no pesky 10Q’s and such), compare their original first half 2022 report with the more recent updated post-restatement report they filed at the end of March.
Before – “Net revenues grew by 590% year over year and reached RMB10.6 million (US$1.6 million) in the second quarter of 2022. Net revenues of the first half of 2022 were RMB18.1 million (US$2.7 million), increasing by 451% year over year.”
After – “Net revenues grew by 558% year over year and reached RMB21.8 million (US$3.3 million) in the second quarter of 2022. Net revenues of the first half of 2022 were RMB36.5 million (US$5.5 million), increasing by 592% year over year1.
Ain’t that great? Revenues just doubled, so how about the management team all award themselves some options to celebrate? Just wait for it…
Before – “Total operating costs were RMB529.5 million (US$79.0 million) in the second quarter of 2022 and RMB623.4 million (US$93.1 million) in the first half of the year, as compared with RMB78.0 million and RMB120.5 million for the same periods of 2021. The significant increase was mainly due to the Company recording RMB308.9 million (US$46.1 million) of equity-settled listing costs and RMB164.0 million (US$24.5 million) of share-based compensation expenses in the first half of 2022.”
After – “Total operating costs were RMB533.8 million (US$79.7 million) in the second quarter of 2022 and RMB640.0 million (US$95.5 million) in the first half of the year, as compared with RMB85.9 million and RMB122.3 million for the same periods of 2021,respectively.
Even better. Revenues doubled, and yet operating costs remained about the same. Pure brilliance! It appears that those incentive fees simply just vanished over the course of the restatement and didn’t wind up being added back to expenses anywhere. Imagine what else this CFO could have discovered if they had only hired him BEFORE the reverse merger; we might be looking at a completely different company.
You will own nothing and like it – first of all, remember that these folks basically own nothing. Their PP&E is under $1M. In a presentation they filed the other day they have pictures of shiny, new, and huge charging stations and talk about the billions of dollars that will be invested over the next decade in constructing even more, but that’s not really what these folks do. The best summary of their business comes from a legal document they filed with their data provider, and the summary goes thus:
“Party A is a supplier of integrated charging service solutions. In the online charging services, Party A attracts traffic for operators of new energy vehicle charging facilities through the Kuaidian Platforms, enhances the transaction volume and return on investment of charging facilities operators in charging services, and assists operators in solving pain points such as difficulty in finding piles for end users. Meanwhile, based on the actual situation of the new energy vehicle charging facility operators and their target power stations, Party A provides the new energy vehicle charging facility operators with value-added services such as marketing support, charging facility operation and maintenance, construction / filing / power installation / operation / maintenance of new charging stations, and peripheral supply in the charging stations (“Value-Added Services”)”
Live in the city center and need to charge your Tesla for the week? Don’t want to spend hours in line waiting for an open charging pile? Want to know how much you will be charged before you arrive? That’s what these folks do. It’s like the GasBuddy app for charging piles. They direct traffic to operators in exchange for a cut of the margin, it’s that simple. The rest is just low-margin construction and maintenance.
The net and gross revenue switcheroo – when the company originally filed to come public less than a year ago in their reverse merger into a shell, revenues were broken down into gross revenues and net revenues, with the gross revenues category having 4 sub-components.
Online EV Charging solutions – “NaaS primarily generates revenue from online EV charging solutions by charging commission fees for its mobility connectivity services.”
Offline EV Charging solutions – “NaaS also generates revenue from the sale of offline EV charging solutions to charging station operators and by charging commission fees for services provided for hardware and electricity procurement.”
Non-Charging Solutions and other services – “…such as food and beverage services and from online advertising services.”
Incentive to end-users – “Incentives to end-users represent discounts and other subsidies offered to end-users to encourage the use of platform relating to our online EV charging solutions business.”
The “gross revenue” line item is now gone and has been transformed into “net revenues from online EV charging solutions,” “net revenues from offline EV charging solutions,” and “net revenues from innovative and other businesses.” Not a single “gross” to be found, and those unattractive “incentive fees” have likewise disappeared. It’s also interesting that they managed to transform something as ordinary and prosaic as “non-charging solutions and other services” which included revenues from “advertising” and “food and beverage services” into something with the word “innovative.” Hiring that Bain Capital guy as your CFO is already paying dividends!!
Incentives? Who needs incentives? In my original spiel, I pointed out that “incentives to end-users” basically gobbled up over 90% of their “online EV charging solutions” line item through an effort to induce users to utilize their system of auto chargers rather than somebody else’s. The chargers in their network are often located miles away from any convenient city central location, but no bother there, since enough of an incentive and you can get people to drive some pretty long distances. This means that even though “gross revenues” in 2021 may have been $25.5M, “net revenues” turned out to be a paltry $2.8M; so for every $1 dollar that a station operator paid these guys to find them some traffic, they rebated 90 cents of it back to the consumer. The company also pointed out that in some instances they actually lost money on some charging transactions when the incentive payments were greater than the amount made from the charging solutions. Not exactly the recipe for a high-margin business, but I suppose they can hope that leisure travel will pick up and that over time they can gain more travelers willing to pay full-boat during a refueling stop rather than just city dwellers looking for a cheap place for their weekly refuel.
The company apparently didn’t like having to disclose to the (US) investing public that they were basically giving away those valuable “online EV charging solutions” services for free most of the time, so they opted to change the rules of the game and eliminate those pesky “incentive” payments completely out of their financial statements by eliminating the idea of “gross revenues” and just reporting the underlying “net” amount. Did those incentive fees get added into SG&A somehow or wind up part of another line item? You would think that any type of cash outflow back to subscribers that it would show up somewhere. As they point out in their “restated” filings the number one reason for the restatement, though some of the other reasons are pretty impactful as well (they list 10 total).
“revising the presentation of gross revenues, incentive to end-users and net revenues.”
“reclassifying platform service fee, bandwidth expenses and server custody costs from research and development expenses to cost of revenues. “
“revising the measurement policy for revenue from membership program and full station operation.”
“reclassifying balance sheet line items, such as reclassifying balances related to sales of charging piles from prepayments, other receivables and other assets to trade receivables, and balances related to payables to charging station from other payables and accruals to trade and bills payables, etc.”
Some balance sheet items changed as well. When the balance sheet changes during a revenue restatement, it’s best to hold on to your wallet. You can compare them in their respective press releases, but they seem to have discovered some additional assets during the course of their restatement, with the carving out of some prepayments into “receivables” as the largest change. When you compare the numbers from June and December, they increased from a restated $10.0M at the end of June to $18.8M at the end of December. Now, normally, that $8.8M increase in receivables would translate into at least $8.8M worth of top-line revenues, but not in this case, as revenues in the back half of the year were only $8M.
How do we hide those rotten Q4 numbers? I got it!!! Delay until we can release some updated Q1 numbers! As has been proven on a number of occasions, if you simply delay things long enough in the hopes that they get better, then it’s almost like it never really happened. A few days ago the company released Q4 and 2022 unaudited financials that should have caused some concern. Their “charging volume” metric was up only 3% sequentially, even though they supposedly expanded their “charging stations” footprint by 12% and installed chargers by close to 20%. Revenues of $4.3M are higher than the $3.7M from Q3, but those all-important “net revenues from online EV charging solutions” actually declined sequentially from $2.22M to $2.16M. Those are the reason why anybody should be interested in owning the stock. Perhaps not the hot growth story many fans thought this would be? If it wasn’t for the (relatively) large increase in “offline EV charging” revenues then the quarter might have been termed a disaster.
So to recap Q4: the supposedly hot, high margin “online EV charging” revenues are in decline, while the old-school construction and new-age gas station management part of the business is showing some growth.
Recent Developments!!! After announcing Q4 results they include some numbers in “Recent Developments” where they give updated Q1 metrics; here we are told that the charging volume increased 19% in Q1 vs. the 3% rise in Q4, and that they inked a $5M “turn-key” construction agreement to build a 60-charger station in Wuhan (of all places). That should help them, according to their updated outlook, to reach $72M-$76M in 2023. Their most recent Q4 was only $4.3M and they did $13.5M for the entire year, and now they are throwing out a $72M minimum full-year number. How exactly are they going to get there? Well, they don’t really say, though the large increase in prepayments likely means there are some construction projects waiting in the wings.
67%!!! Just for kicks, what would it take, on a sequential growth basis, to hit $72M for the year, growing off of a $4.3M Q4 base? 25% sequential growth gets you to a $30M revenue number for the year. 50% gets you to $52M for the year. They are going to have to print 67% growth each and every quarter in order to hit the bottom of their range. 67%!!!! Each quarter!!!! This is coming off of a 14% increase they just printed going from Q3 to Q4, which was down from the 15% increase from Q2 to Q3, which was down a lot from the 48% they printed from Q1 to Q2. So in other words, they’re going to have to put up the best growth number they have basically seen in the past year, and it starts with a minimum $7M number for Q1.
With 220M or so ADS’s outstanding, this thing has a market cap close to $2.4B. The company just reported a sub-100% revenue growth year off of a very small base, and they are now guiding to a 700% revenue growth year on the back potential construction projects. A while back I spieled on something called CRGE, a US-based installer of charging stations on the east coast that will do several times the revenues but at less than a tenth of the market cap. So I’ll ask it again; why are we allowing these things to trade on US exchanges?