ZK International (NASDAQ: ZKIN) shares have been surging, evidenced by its triple-digit percentage increase since the start of November. But, despite the run, investors didn't miss their chance to catch value. Profit-taking into the holiday weekend has kept the opportunity in play. And after signing yet another significant contract, the value proposition exposed by profit takers may be too attractive to ignore. And that case just got stronger.
Last week, ZKIN announced securing an $8 million bid in collaboration with Chongqing Gas Group, which does more than create a new revenue stream; it strengthens ZKIN's position as a key supplier and contractor in the Western China gas market. It's no small opportunity. Chongqing City is the fourth largest Chinese city, with an estimated urban population of 16.34 million. Leveraging its vast industry and project expertise, ZKIN was able to check the right boxes to attract interest, which should do more than benefit the city's municipal gas piping infrastructure project; it can fuel ZKIN's already impressive growth pace. Keep in mind that plenty more deals from the Chinese markets alone may be in the pipeline.
That's a valid expectation based on what's happening in China. In ZKIN's update, China's Ministry of Ecology and Environment's 2020 initiative intends to replace coal with clean energy in the heating systems of 7.09 million households in the northern provinces, spurring enormous demand for natural gas and gas piping infrastructure. Having a foot in Chongqing Gas Group's door could, therefore, be a value driver of its own, noting it's a flagship division of China Resources Gas Group Limited. Also, keep in mind that Chongqing Gas Group Co., Ltd., as it is, is no small player. Listed on the Shanghai Stock Exchange, it has a market capitalization of roughly $1.5 billion, generating annual sales averaging roughly $1.22 billion. That's a historical performance. By pioneering the urban pipeline gas business over two decades ago and becoming a key contributor in the country's energy sector, growth at that company is expected to continue, fueled by adding integrated energy services that enhance its core businesses focus on natural gas sales, integrated energy services, energy trade, and energy transmission and distribution.
Good news for them can also be excellent for ZKIN.
Accretive Value Drivers Support The Bullish Sentiment
In fact, it should keep momentum at ZKIN shares back as it targets reclaiming its 52-week high of $1.34. But this most recent deal isn't the only value driver. Others combine to expose a valuation disconnect between the ZKIN share price and performance. Still, deals made and others expected could close that gap quickly, especially with listing compliance fears eliminated and from 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 58% higher than their current.
But know this: the deal with CF provided more than a financial boost; it gave a decidedly bullish vote of confidence. That's not surprising, considering its over 100% share price run is supported by tangibles — 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.
As importantly, ZKIN's steepening revenue trajectory shows the company can manage challenging market conditions. In response, investors showed their confidence in that ability by bidding shares higher. Remember, market analysts know the intimates of the sectors they cover; if ZKIN were not effectively managing its current projects or capitalizing on new opportunities, its share price wouldn't be close to reclaiming its yearly highs. That mark is already in the ZKIN investor's crosshairs, a target in play from ZKIN's revenue growth coming partly from a strengthening recovery in domestic demand. That's led to an overall increase in sales volume — a trend that should continue.
Expanding Its Business Footprint
Remember, despite ZKIN's microcap stock price, the company is well-recognized as an industry leader in the 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, they can provide better solutions.
In many cases, ZKIN product differences are distinct advantages over the competition, including double-press thin-walled stainless steel tubes and fittings, carbon steel tubes and fittings, and single-press tubes and fittings. These unique offerings should continue to drive market share. And not just in its primary Chinese market but also in Europe and Southeast Asia, where the company continues to work at expanding its business footprint. Penetrating new markets, local and international, could happen faster than many expect, resulting from ZKIN supplying the next generation of clean water solutions with innovative, high-quality piping infrastructure solutions supported by robust intellectual properties.
While more may be coming, ZKIN currently holds 33 patents, 21 trademarks, 2 Technical Achievement Awards, and 10 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 allow ZKIN to easily 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.
A Significant Rev-Gen Pipeline
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 61% of groundwater and 28% of key rivers are 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.
Enhancing A Massive Infrastructure
The better news from a ZKIN investor's perspective is that the company is positioned to benefit significantly. Reports show that the Chinese government has earmarked $610 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 from that massive program adds to other already 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.
That's not all. While ZKIN intends to earn significant revenues from those projects, they are monetizing others from state-owned water supply companies engaged in major water supply and construction projects. That business is deserved. And by ZKIN operating from a position of strength in terms of industry development, the deal-making trend should steepen. 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 that ZKIN was 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 produce products that meet those geographic market compliance measures.
Concurrent Value Drivers Expose The Value Proposition
Moreover, it adds to a growing list of current and expected value drivers that should drive 2024 revenues appreciably higher. It's vital to remember that few companies can do what ZKIN does, and an even more select few have access to the multi-billion dollar contracts awarded by China and other developing countries and companies. But access is just one part of the opportunity. Having the professional ability to seize them is the bigger consideration. ZKIN checks that box.
That's significant. Why? Because 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 reality is what should keep ZKIN in a sweet spot of opportunity. And with ZKIN continuing to innovate, maintaining superior product quality, and forming strategic partnerships, that position can be leveraged not only in 2024 but for decades. Thus, better positioned now compared to when its shares scored their 52-week best, the ZKIN bulls may be correct: the Q4 surge in the company's stock may be the precursor to bigger gains next year. Factoring the sum of ZKIN's parts, they may very well be right.
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