- Solar power systems developer SolarMax is aiming to raise $30 million in a New York listing, but investors could balk at the company’s lack of diversity
- The IPO marks the latest signal that Chinese listings could soon gain momentum in New York after a yearlong near-halt due to regulatory concerns in the U.S. and China
By Doug Young
Its name may sound hot, but a newly filed New York IPO plan from the China-related SolarMax Technology Inc.SMXT tells quite a different story.
That’s our overall assessment of the upcoming listing by a company whose IPO prospectus filed last week shows it’s sorely in need of a lesson in the importance of diversifying its revenue sources. Other than its position as a small player in the hot solar power sector, the other noteworthy thing about this IPO is that it’s one of the few by a China-related company in New York lately.
Such listings came to a near-standstill about a year ago after the disastrous IPO for the Uber-like DiDi GlobalDIDIY, which managed to upset regulators in both the U.S. and China. Many – though not all – of the issues that put the brakes on most offerings after DiDi have been resolved now, including last week’s closing of a cybersecurity review against DiDi that results in a record fine of 8 billion yuan ($1.2 billion) against the company.
With that issue in the rear-view mirror, it’s quite possible that the SolarMax IPO could signal the resumption of more Chinese offerings in the months ahead, including some potentially larger ones.
With regard to size, SolarMax’s IPO is relatively modest, aiming to raise about $30 million by selling 7.5 million shares for $4 apiece, the prospectus shows. In fact, this isn’t the first time SolarMax has sought such a listing. It originally filed for a New York IPO in December 2018. But it withdrew the application in October 2020, saying at that time it decided to make a backdoor listing using a special purpose acquisition company (SPAC) instead. That SPAC deal apparently never happened, which is why the company is coming back to market now with the latest IPO plan.
Truth be told, there’s not too much to get excited about with the company in its current form. But it does seem to have a solid enough foundation in its core areas of building industrial-scale solar farms in China and rooftop-style solar power generation projects for both residential and commercial clients in the U.S. Thus, if it could use its base and expertise to find more customers for one or both businesses, the company could have some room for significant growth.
There’s certainly no shortage of opportunities in either business area. China and most western countries are aggressively building new solar farms to wean themselves off dirtier, carbon-emitting energy powered by coal and natural gas. That drive has gained urgency in recent months with Russia’s invasion of Ukraine, which has led most western countries to accelerate their new solar project building to eliminate their reliance on Russian oil.
Now SolarMax just needs to tap into some of that demand.
Thin client roster
SolarMax is actually a U.S. company, based in the state of Nevada. It has two units, one in the U.S. building onsite rooftop-style solar systems for residential customers and commercial clients like factories and office buildings. The other unit is in China, building industrial-scale solar farms.
The China operation was the company’s big breadwinner until recently, providing more than 70% of its $131.6 million revenue for 2020. But then the company’s China-based revenue plunged to just $7.8 million last year from $94 million in 2020. As a result, its overall revenue also plunged 71% in 2021 year-on-year.
The reason for the plunge is quite easy to identify, and owes to SolarMax’s reliance on a single customer in China, a state-owned company called State Power Investment Corp. Guizhou Jinyuan Weining Energy Co. Ltd. (SPIC). SolarMax was building four projects for the client over the last two years, and finished the work in 2021. As a result, its China-based revenue fell to zero in the first three months of this year. What’s more, there’s no indication in its prospectus that is has any new work coming from SPIC, or any other China clients, in the near future.
SolarMax’s U.S. business is a bit more stable, though its revenue also dropped to $27.3 million last year from $28.8 million in 2020. But here again, the company points out that all of its U.S. business of installing rooftop-style solar systems is based in the state of California, once more underscoring its lack of diversity.
The bottom line is that SolarMax incurred negative cash flow in 2020 and 2021, as well as $2 million in negative cash flow from its operations in the first three months of this year. It added that its financial statements for the last two years have included language indicating it could face a cash crunch that could halt its operations at any time.
Its cash position looks a little uncertain at the moment, though not at crisis stage just yet. SolarMax had about $5 million in cash at the end of March, though that could rise to more than $30 million if it can complete its IPO. It made no mention of short-term debt in the prospectus, though it had about $45 million in long-term debt.
The prospectus said the company intends to use proceeds from the IPO for general corporate purposes, most likely to fund its money-losing operations that included a $1.3 million net loss in the first three months of this year. But it’s possible the company could also use some of the new funds for another acquisition that could help it diversify in either the U.S., China or both.
In valuation terms, SolarMax would be valued at about $190 million if it can complete the IPO based on the terms in its prospectus. That would give it a price-to-sales (P/S) ratio of about 0.6 based on its 2020 revenue, though the figure drops to just 0.2 based on the 2021 revenue figure. Similar solar farm-building specialist ReneSola SOL trades at a far higher P/S ratio of 5.7, showing just how modest SolarMax is pricing its offering.
Such modesty is really appropriate in this case, and even at this relatively low level the company could have difficulty attracting investors to its shares.
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