I truly can’t explain it. Sometimes a story will strike me as just particularly silly and obvious, and I just can’t seem to shut up about it. It’s rarely about a name that turns out to be an extremely popular idea, or one that has the ability to easily become one, but it is happening now with NAAS just like it happened over the past couple of years with PYR. For some reason, I just can’t let an earnings release go by without making some sort of comment about it; so if this story holds no interest for you, feel free to move along.
If it seems like only yesterday that I updated the NAAS story after their second quarter earnings release, you’re not too far off. On September 8th they chose to share their Q2 results with us, and now on October 26th we get to see what happened in Q3. They do appear to be making some progress on the financial reporting front perhaps, but there were a few other things I thought worthy of pointing out.
First, there’s no mention of Charge Amps. I know, an odd thing to first point out from an earnings release, but it’s the first thing that struck me. Back on August 22nd, the company announced that they would be purchasing Swedish charging company Charge Amps for $66.4M and entering the “international” market. In their Q2 release a few weeks later, they made a point to highlight the acquisition and its benefits to the company. This quarter? Silence. No 8K’s filed in between to say the acquisition has been completed, no changes to the financials they reported showing any increases in things like goodwill or intangibles which typically accompany an acquisition, just nothing. Perhaps the conference call made a reference, but nothing in the release other than the CEO Yang Wang cryptically saying (and that’s assuming Hong Kong is not “beyond” mainland China):
“Meanwhile, our expansion beyond mainland China has already yielded fruitful result and contributed 32.7% of total revenues this quarter.”
Second, they decided to change their reporting yet again. After coming public and not liking the scrutiny surrounding their reporting format, the company decided that they would change how they reported charging revenues from a gross amount less discounts basis to a net basis. Even though nothing is supposed to really change during these little accounting changes, somehow during that last translation they managed to basically double their charging revenues, but whatever.
This time around they decided that “online EV charging solutions” and “offline EV charging solutions” may have been a bit too close but really vague for some of us, so for the most part they combined them into something called “charging services revenues” which should be much easier to understand. Then they added some of what was leftover into something called “energy solutions revenues” and combined them with something they bought back in June called Sinopower Holdings. Sinopower does rooftop solar installations in Hong Kong, and those revenues didn’t really match anything else they were doing at the time, so they needed to carve out a special place. They finally opted to keep the “other” category, just because who doesn’t need one (revenues here under $100K)?
Third, the newly christened “charging services revenues” which is ostensibly what this company came public claiming to do, rose only 23% year over year, and due to the accounting change, we truly have no clue how it will compare to the last few quarters. But 23%? Given how much they are spending to increase their base of charging stations, that is truly pitiful. Last quarter, by contrast, they were claiming at least 91% revenue growth (that was from their “online” EV charging revenues, while their “offline” growth was much higher at 153%, and their new metric is some combination of both). Compare this 23% increase to the metrics they like to highlight every quarter:
73,710 charging stations, up 65% year over year.
767,611 chargers, up 76% year over year.
$178,800,000 gross transaction value, up 58% year over year.
59,200,000 orders, up 58% year over year.
You build out your network of chargers by 76%, increase the “gross transaction value” by 58%, handle 58% more orders, add 65% more charging stations, and yet increase revenues only 23%. How does that happen? Where are they placing their chargers? Farther away from civilization perhaps? But the rise in “gross transaction value” doesn’t explain that.
Fourth, that punk charging services revenue increase is not even due to their “rebate” program. So remember the first accounting change got rid of the part where they reported “gross” revenues and then they also fessed up to how much in “incentives” they had to pay drivers to visit their charging locations? Well, they still sorta fess up to that number (the disclosure disappeared in Q1 but made a reappearance in Q2 and now Q3), and in Q3 it was $11.4M which was up only slightly from $11.1M in Q2. So the punk revenue growth here isn’t due to them offering some higher rebate to potential customers if they decide to come use their chargers over somebody’s else’s. So unless the economics of the relationship they have with the actual charging stations owners changed, how you can have orders and gross transaction value be up 58% and keeping their rebates in check and yet revenues up only 23% is a headscratcher.
A fifth point, the revenue standout for the quarter came from the “energy solutions” group, which was recently combined with Sinopower, but used to be called their “engineering procurement construction (EPC)” business. This segment went from basically nothing to $19.0M inside of a year and up from maybe $3M in Q2 which is nothing short of spectacular. This division is likely the party responsible for their gross margin bump year over year from 6.1% to 27.4% as well. How do I know that? Well, it didn’t really exist a year ago, so what else could it be?
Why bother trying to build a network of charging stations when you can just fire off these large contracts seemingly at will (just wait for my next point). Sure OPEX went up a bit, but nothing compared to the revenue bump they just got from this lone contract. And by the sounds of it, it’s not even over.
This sixth point will be about guidance. They maintained their revenue outlook for the year at $69M to $82M (they’re only at $35M through the first 9 months), and get this, between $274M and $411M in 2024, meaning these wonderful “energy solutions” contracts are still out there (assuming they’re real, of course). They’ve done a punk $11.2M in charging services revenues so far in 2023, and by the looks of it won’t get to more than $16M or so for the year. If you put that 23% revenue growth number on $16M, you get to $20M or so next year, tops. Truly, why even bother with it? It will be less than 10% of what they expect their overall revenues to be, and yet they spend 90% of their press releases talking about it. Energy solutions gets a one-liner explanation with zero background about what they did to earn that money and we’re supposed to be enthralled. I have my suspicions about what is really behind these revenues and their growth, but I’ll leave that for another time.
Against that revenue backdrop, you had some continued odd happenings occurring on the balance sheet.
“Financial Assets at fair value through profit or loss” added $24M into the current assets category, while keeping the previous accounts in the longer term assets designation relatively the same. These were explained in a prior filing as investments in private companies for which there is no publicly quoted price, though the current asset nature of this one makes me think something is different.
“Contract Assets” makes its debut with $13.7M.
“Prepayments, other receivables, and other assets” continues to climb and is now $76M, up from $48.2M last quarter.
Despite selling $70M worth of convertible notes to LMR Partners LTD. during the quarter, the company’s cash balances actually declined from $71.2M to $54.3M. Oh, and LMR supposedly already converted $33M worth of those notes into ADS’s. Given the recent share price, I’d say LMR has close to 10M ADS’s at this point.
Trade receivables were only up $7M to $32M. Given the huge revenue influx I was expecting more, though some of the true balance may be squirreled away in the “prepayments, other receivables” category which saw a nifty jump. Now, they were at $25M at the end of Q2, and prior to reporting Q3 numbers this company hasn’t recorded $25M in revenues in their entire existence, so the accuracy here, in my mind at least, is somewhat in doubt.
At quarter end, they had $96M in bank borrowings and $69M in convertible debt, which is now supposedly $33M less.
Share-based comp of $44M so far this year? Seems like Bain has been teaching them something about modern finance.
They don’t bother with a cash flow statement in these interim reports, so we’ll have to wait for the annual report next year to see how long this cash burn can possibly last them.
So there you have it. Put together some of the questions I pointed out here about their metrics and their accompanying revenues and add them together with some of the oddities surrounding their balance sheet and you get the basic idea for why this story keeps me coming back quarter after quarter.