The post-New Year hangover for smallcap stocks remains. But that's not necessarily bad news for investors searching for value-based investment opportunities. In fact, sympathy-based pullbacks over fundamentally induced ones often expose significant valuation disconnects. ZK International (NASDAQ: ZKIN) may be one of them, a presumption supported by tangibles, not hypotheticals. Here's proof.
To close 2023, ZKIN regained NASDAQ listing compliance, announced securing an $8 million bid in collaboration with Chongqing Gas Group, successfully closed a $5 million financing above the market, and revamped its corporate website to better reflect its growing footprint to provide best-in-class infrastructure products and services to a growing international market clientele. Despite the value-creating updates, ZKIN shares are off a 52-week high of $1.35 set in December, which is difficult to reconcile considering ZKIN is better positioned today for expedited growth compared to then.
However, some profit-taking may have indeed been warranted. At its high, ZKIN stock surged over 164% since last November. And even at its current price of $0.86, the stock still holds gains of over 68% since that same period. Perhaps the best news about ZKIN stock is that the best may be yet to come, an expectation supported by the company's proven ability to score significant contracts in its home country, China, and other international markets.
Multi-Million Deals Fuel Growth In 2024
Securing an $8 million bid with Chongqing Gas Group supports that proposition, not only from a revenue growth perspective but also by strengthening ZKIN's position as a critical supplier and contractor in the Western China gas market. It could be a deal that keeps on giving, with the bid showcasing ZKIN's abilities to serve large contract specifications. Chongqing City is the fourth largest Chinese city, with an estimated urban population of 16.34 million. In other words, ZKIN is trusted to provide invaluable services to a massive population regarding the city's municipal gas piping infrastructure projects. That trust can indeed be a value driver and, importantly, from an investor's perspective, can shift an already fast growth pace into a higher gear.
That bullish case is justified by more than ZKIN's position to exploit significant business opportunities; what's happening in China and, as importantly, where ZKIN is focused matters as well. Particularly, ZKIN seizing opportunities inherent to China's Ministry of Ecology and Environment's 2020 initiative, which intends to replace coal with clean energy in the heating systems of 7.09 million households in the northern provinces. That change will create enormous demand for natural gas and gas piping infrastructure. Thus, leveraging just its relationship with Chongqing Gas Group could be a massive value driver in 2024.
Remember, Chongqing Gas Group Co., Ltd. is a significant player in the Chinese market. Listed on the Shanghai Stock Exchange, it has a market capitalization of roughly $1.5 billion, generating annual sales averaging approximately $1.22 billion. And like ZKIN, they expect to get bigger faster; its mission fueled by pioneering the urban pipeline gas business over the past two decades and becoming a vital contributor in building the country's energy infrastructure. Moreover, with Chongqing Gas Group, a flagship division of China Resources Gas Group Limited, that growth could happen sooner rather than later. If so, ZKIN could ride on some excellent revenue-generating coattails.
Contributing Value Drivers Support Bullish Proposition
Still, as potent as this deal can be, it's far from being the only near-term value driver. Other deals contribute to exposing a valuation disconnect between the ZKIN share price, its assets, and performance. That includes, as mentioned, regaining listing compliance, which removes any dark cloud of continued NASDAQ listing uncertainty. That's not all. As noted, private investors have provided a significant financial vote of confidence, evidenced by a $5 million above-the-market passive Share Purchase Agreement (SPA) from the CF Opportunity Fund, Ltd.(CF). The terms of that deal are company and shareholder-friendly, with stock purchases related to that agreement fixed at $1.70, about 97% higher than their current.
Reading between the lines of this deal may be wise, noting that investments this size are typically made only after considerable due diligence. What supported CF's investment decision likely combines well with published performance — particularly topline growth. Most recently, ZKIN reported comparative six-month revenues in 2023 increased by over 15% to $49,655,399, a $6,764,742 jump over the same period totals last year. That gain comes despite challenging market conditions such as the increased cost of raw materials, especially nickel, a vital component of stainless steel and a key ingredient to many of ZKIN's product production.
ZKIN's steepening revenue trajectory shows that the company can manage the range of market conditions. Remember, market analysts know the intimates of the sectors they cover. If ZKIN was not effectively managing its current projects or capitalizing on new opportunities, its share price wouldn't hold these significant gains made in Q4. It is. And considering stock prices are generally appraised using a forward-looking model, a strengthening demand for the products and services ZKIN provides could create a path of least resistance for ZKIN shares higher.
An Expanding International Business Footprint
That expectation is warranted. Keep in mind that despite ZKIN's microcap stock price, the company is well-recognized as an industry leader in manufacturing and engineering high-performance stainless steel products used in sophisticated water or gas pipeline systems. That unique ability to serve specialized demand is doing what it should- leading to increasing market share that results from urban infrastructure project planners, real estate developers, local governments, and municipalities need to bring reliable and durable gas and water transmission systems to their communities. Not only can ZKIN deliver what's required, but they can also provide better products and service solutions, with differences providing distinct competitive advantages.
ZKIN owns 46 patents, 46 trademarks, 5 Software Copyrights, 2 National Innovation Fund Awards, and 41 National and Industry Standard Awards. They are also Quality Management System Certified, Environmental Management System Certified, and a National Industrial Stainless Steel Production Licensee. Those recognitions and permissions allow ZKIN to more quickly and efficiently tap into the multi-billion dollar Gas and Water sectors that need specialized and environmentally compliant steel piping — and the company is capitalizing on those potentials by providing unique offerings that should continue to drive market share in its primary Chinese market and also in Europe and Southeast Asia, where the company continues to expand its services footprint.
Penetrating new markets, local and international, could happen faster than many expect, especially with ZKIN supplying the next generation of clean water solutions with innovative, high-quality piping infrastructure solutions. That's a mission in progress.
An Impressive Business Resume'
ZKIN has supplied stainless steel pipelines for over 2,000 projects, including the Beijing National Airport, the "Water Cube," and "Bird's Nest", venues for the 2008 Beijing Olympics. Passing the rigorous standards at those locations was not a one-off win. Its over 2,000 other clients, large and small, receive the same superior properties and durability of its steel piping, providing an accessible solution for delivering high quality, highly sustainable, and environmentally sound drinking water to its clients in China, Europe, East Asia, and Southeast Asia. At many of these client locations, time is of the essence.
The urbanization of China is an excellent example of why. Despite being home to roughly 20% of the global population, the country only has 7% of the world's freshwater resources. Potentially worse, within the next 10-20 years, China is projected to move roughly 250 million people (more than the total U.S. urban population) into cities — some of which have yet to be built, and those that have begun still lack basic starting infrastructure. Adding that count to the current urban population, China must procure the water services infrastructure to serve approximately 900 million people, or roughly 13% of the world's population. However, that only accounts for the urban crowd. The country will also need to provide water for 400 million rural residents and meet the demands of the agriculture, energy, and manufacturing sectors.
That urgent need makes ZKIN timely to a massive opportunity. While not earning the headlines deserved in the States, the seismic population shift in China is already negatively impacting the country's urban infrastructure, contributing to an estimate that about 70% of the water quality is classified as unfit for human contact. It gets worse. Research indicates that over 20% of the water supply is so polluted that it cannot be used for industrial or agricultural use, causing an estimated 6% reduction in annual GDP, according to the World Bank. The good news is that China isn't turning a blind eye to the current problem or its potentially worsening future.
Targeting An $850 Billion Infrastructure Opportunity
Reports indicate that the Chinese government has earmarked $850 billion to spend on water infrastructure improvement starting in 2011, which is expected to be completed in early 2030. Groundwork completed from its $68 billion South-to-North Water Diversion Project has provided an excellent start to avoiding humanitarian catastrophe. The completed project will link China's four main rivers with more than 1,800 miles of pipeline, diverting water from the south of China to population centers in the north. The potential of that massive program adds to other contributing value drivers.
Current ZKIN projects include working with the China Railway First Bureau Group, Zhuhai Water Environment Holding Group, and Changsha Water Group to strengthen and enhance their services infrastructures. They also announced renewing a contract with Towngas China Company Limited, one of Asia's largest gas and utility suppliers, entering an agreement with Shenzhen Water Group to replace the aging water supply infrastructure within its city and securing a $1.2 million contract with The XingRong Group, one of the largest water treatment and supply companies in Western China.
While ZKIN intends to earn significant revenues from those projects, they are monetizing others from state-owned water supply companies engaged in substantial water supply and construction projects. And they could score plenty more. That's not an overly ambitious expectation, considering that ZKIN has been a vital contributor by developing specialized stainless steel pipes for direct drinking water in the country. They are so good it's led to ZKIN being authorized to draft many national standards of stainless steel pipe and clamp pipe fitting. That designation can more than expedite penetrating the Chinese markets; it accelerates monetizing opportunities in Europe and the United States by meeting or exceeding their respective requirements. That makes ZKIN one of the few manufacturers that can already produce products that meet specific geographic market compliance measures.
ZKIN Differences Are Advantages
That ability and advantage can be a catalyst in terms of near and long-term growth for ZKIN. Supporting that assessment is that ZKIN can already do what many of its competitors are aspiring to do, putting them in a position to exploit a sweet spot of opportunity by being able to deliver highly specialized products and services that others can't. That's a big deal.
Remember, every nation — developed or not — is upgrading infrastructure to serve shifting populations, meet technological changes, and remain proactive in safely and effectively meeting current and future societal needs and demands. That transition is more than excellent news for those populations; it can also be for ZKIN, which can benefit from continuing innovation, maintaining superior product quality, and forming strategic partnerships that can solidify market position and increase share not only in 2024 but also into future decades.
In other words, the case for the Q4 surge in ZKIN stock being the precursor to more significant gains this year is strong. In fact, the sum of ZK International's parts today supports a compelling and bullish thesis. However, evaluating ZKIN the right way, using a forward-looking perspective and model, the value proposition is even greater; a calculus that does more than support the thesis for ZKIN's share price trajectory to steepen; it justifies the investor interest.
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