$NISN - The Perfect Chinese Cigar Butt: Nisun International
The Perfect Chinese Cigar Butt: Nisun International
Jan. 31, 2025
Nisun International Enterprise Development Group Co., Ltd (NISN)
Giacomo Bocanegra
https://seekingalpha.com/article/4753920-the-perfect-chinese-cigar-butt-nisun-international
Summary
NISN is deeply undervalued, trading at a 1.70x to 2.35x PE ratio, and offers significant upside potential with a price target of $32 per share.
The company is now focusing on high-margin services like supply chain financing and campus catering.
NISN's $15 million buyback program and strategic expansions highlight management's confidence in the stock's undervaluation and growth potential.
Valuation models, including DCF and Gordon Growth, indicate an intrinsic value of $49.64 to $52.45 per share, far above the current $6.11.
Background
Nisun International Enterprise Development Group Co., Ltd. (NASDAQ:NISN) is one of China’s main suppliers of corn, eggs, and gold, founded in 2005. The company also provides small and medium enterprise financing solutions and is expanding into the franchise business on college campuses. Last week, the company announced a rather strategic move towards the franchise business (KFC) and a reduction in selected supply chain trading businesses as the market is characterized by low margins and high capital requirements. Management believes there are better places to allocate capital. NISN currently trades for no-brainer multiples and, of course, extremely cheap valuation, mainly due to skepticism arising from prior short-selling reports by Grizzly Research and GeoInvesting that are no longer a concern, in my opinion. The company has further reaffirmed guidance for the 2024 fiscal year, which includes revenues in the range of $300 million - $350 million, net income in the range of $11 million - $15 million, and EPS in the range of $2.6 - $3.6.
This leaves NISN trading in the range of 2.35x - 1.70x PE ratio. This not only represents a steep PE discount to its direct and indirect peers, but also as low as it gets in the overall agriculture market. With an equity value of $208 million, NISN represents an 86% discount to book value and is expected to trade for a sharper discount, with the equity value expected to increase when the company reports its full-year 2024 numbers before the end of April 2025, as per my projections considering the latest press release.
NISN’s stock is down 71% from a peak in early October 2024, and down 87% since the company went public in late 2016 at $49.50 per share after adjusting for share issuance. The corporation has under the radar partnerships with China’s largest e-commerce and delivery companies, including JD.com, SF Express and Meituan. The company is a STRONG BUY with a price target of at least $32 per share.
Investment Thesis
This is the perfect Chinese cigar butt. It has a market cap of a little over $28 million and has announced a $15 million buyback program, representing over 53% of its market capitalization. To date, the company has repurchased 121,341 shares at an average price of $8.68 per share, totaling $1.05 million--approximately 7% of the total buyback authorization. With nearly $14 million remaining in the buyback authorization, NISN has the opportunity to repurchase more than half of its outstanding shares at current market prices. Combined with their recent strategic expansions into high-growth areas such as rubber supply chains, traditional Chinese medicine, and campus catering, NISN is leveraging its capital to drive shareholder returns and strengthen its growth potential in a robust Chinese economy that showed a 5% growth in 2024.
Bodang Liu, the largest shareholder with an interest in the company of 21.92% as per the last reported 13D, has increased his position through open market purchases. On August 8, 9, and 19, 2024, Mr. Liu acquired 102,700 additional shares at an average price of $9.73 per share, for a total cost of approximately $999,178. These purchases raised his ownership stake from 19.36% to 21.92%. His continued investment aligns with the company’s undervaluation narrative, supported by its cash per share of approximately $11.91 and ongoing share buyback program.
Earnings Highlight
The company is expecting 2024 top-line numbers at around $300 million - $350 million. This means that the second-half revenues are somewhere in the range of $107.5 million - $157.5 million. Net income for the same year is projected to be in the $11 million - $15 million range (EPS: $2.60 - $3.60).
To stay on this course, NISN is removing resources out of low-margin supply chain trading businesses and into higher-margin services, e.g., supply chain financing solutions, accounts receivable factoring. Newly elected CEO Xin Liu explained: "Our recalibration toward supply chain financing solutions is a direct response to market dynamics and our goal of delivering stronger, more sustainable results. We remain committed to innovation and operational excellence as we reposition our Company for the future."
Additionally, NISN is expanding its KFC campus catering business after its initial success. Liu highlighted: "This initiative will serve as an additional growth driver, complementing our other core lines of business." Looking ahead to 2025, NISN is confident in its ability to sustain growth by focusing on higher-margin opportunities and leveraging its streamlined operations. Liu summarized: "Our preliminary forecasts underscore the progress we are making in reshaping our business and highlight our commitment to enhancing shareholder value."
Valuation
Discounted Cash Flow Analysis - DCF
Using a WACC of 12.6% and a terminal growth rate of 1.1%, I have built a rather robust DCF model that discounts NISN's future cash flows to come up with an accurate intrinsic value in the next 6 years. Using the below growth and decline assumptions for small & medium financing, supply chain financing, and supply chain trading for 2024 and onwards, I expect the company to have revenues of $367.7 million in 2024 (on the high side vs. expected revenues of $300 million - $350 million for the year). NISN’s main segment, supply chain trading, operates in an industry with very low margins and high capital requirements. The CEO views a slowdown in capital allocation towards this segment. Therefore, I have forecasted a decline in this particular segment and further conservative growth in the two other segments.
Historically, before the company aggressively expanded its supply chain trading business, the company was able to sustain EBIT margins in the two-digit range. However, after its expansion into supply chain trading, which includes buying and selling corn, eggs and gold, margins were sacrificed as revenue grew. NISN has been operating in the single-digit EBIT margins and will continue to do so as per my conservative assumptions of 5% to 7% in 2029. Taxes were kept rather flat at a rate of 29% for this valuation.
NISN is worth what its book value states. My DCF implied equity value is $199.4 million, or $49.64 per share. The book value of the company as per the first half of 2024 is $208.8 million, or $51.97 per share. The company only trades for $6.11 per share.
Exit Multiple and Gordon Growth Analysis
I also built a valuation model for NISN using both the Exit Multiple Method and the Gordon Growth Method, and both reveal massive upside potential for the stock. Using a conservative exit multiple of 3.0x--well below industry leaders in supply chain financing and technology--the equity value of NISN comes out to $210.7 million, or an implied share price of $52.45. Way higher than the current market price of $6.11.
The Gordon Growth Model, applying a terminal growth rate of 1.0%, reflects an equity value of $207.1 million, or $51.55 per share. The modest terminal growth rate assumes NISN sustains its competitive position in the supply chain financing sector, driven by its recalibration toward services with lower capital intensity and higher scalability, such as accounts receivable factoring.
These valuation models confirm the unrealized potential embedded in NISN’s current market price. If the company continues to execute its strategy effectively--including expanding the KFC campus business and reallocating capital to its high-margin financing solutions--the implied share price could climb even higher as operating margins improve and growth accelerates in 2025.
Potential Risks
Nisun’s realignment to shift resources away from supply chain trading toward higher-margin franchise operations could bring some risks. For fiscal year 2025, I anticipate total revenues of $356.5 million, with $230.8 million expected to come from supply chain trading. A 20% decline in this segment, due to reduced focus and reallocation of resources, could result in a $46.2 million decrease in top-line revenue, reducing total revenues to $310.3 million. Considering that supply chain trading accounted for 73.8% of the company’s first-half 2024 revenue, any underperformance in this segment could impact overall performance.
The company’s franchise operations, such as the expansion of the KFC campus business, also present risks. While promising, these businesses are highly consumer-sensitive and dependent on sustained demand from Chinese college students. Franchises typically carry high fixed costs, including marketing and operational expenses, which could erode margins if revenue targets are missed.
Another concern is the potential for slower-than-anticipated growth in supply chain financing solutions, a key focus area for NISN’s future strategy. The segment generated $50.5 million in service revenue during the first half of 2024, and while management plans to expand this segment, a failure to scale these operations effectively could limit revenue growth and offset gains from higher-margin services.
Conclusion
NISN trades at a massive discount to both its book value of $208.8 million and its intrinsic value as calculated by my valuation models. The company expects 2024 revenues of $300 million - $350 million and net income of $11 million - $15 million. This implies a PE multiple of just 1.7x - 2.35x. While the book value per share is $51.97, the stock currently trades at $6.11, or at an 86% discount.
The company has a $15 million share buyback program under its belt, which represents over 53% of its market cap of $28.4 million. So far, NISN has repurchased $1.05 million worth of shares at an average price of $8.68, with $14 million remaining for future repurchases. I have sent a letter to management pushing for an aggressive execution of the Share Buyback Program. I recommended the company to immediately commence open-market share repurchases under the $15 million buyback program announced on October 15, 2024. Given the current stock price, repurchasing shares at this undervalued level presents a compelling opportunity by reducing outstanding shares and increasing EPS. Delaying this initiative would likely result in diminished returns, as rising prices could negate the cost-effective advantage available today.
My DCF model, assuming conservative EBIT margins of 5% - 7%, values NISN’s equity at $199.4 million, or $49.64 per share. Using the Exit Multiple Method with a conservative 3x multiple, the implied equity value is $210.7 million, or $52.45 per share. The Gordon Growth Model, assuming a 1% terminal growth rate, estimates the equity value at $207.1 million, or $51.55 per share. All models indicate an unreal upside.
Finally, NISN is reallocating resources from low-margin supply chain trading into higher-margin areas, such as financing and franchising. NISN is a textbook example of deep-value cigar butt. I believe the company is worth at least $32 per share in the short term, with a long-term upside exceeding $50 per share.
