Between August 2 and August 23, 2013, we performed preliminary due diligence on China Recycling Energy (CREG). We believe the summary of recent developments surrounding the intent of  large shareholders of CREG to liquidate their entire  positions indirectly support our preliminary negative due diligence findings that one of CREG’s projects  was not generating revenue and that its equipment was  idled during our  observation  period . (Basically, where there is smoke, there is fire.)

CREG’s Shares Free Falling

Since June 6, 2014, shares of CREG have fallen by roughly 40%.  On June 24, 2014 alone shares fell 30% closing at $1.67 . On June 25, 2014, the company issued a press release stating :

“that it is not aware of any material corporate developments beyond its most recently issued news releases and filings with the SEC that could account for the recent unusual trading activity in its shares.”

Ironically, we believe that some of CREG’s  SEC filings in June 2014 are the reason behind the stock’s recent weak performance. SEC filings have given us clues that an institutional owner of CREG’s shares, Carlyle Asia Growth Partners , is looking to exit its entire position of 12,465,938 shares, or 20.1% of CREG’s outstanding share count of 60,946,182. Furthermore, another large shareholder of CREG registered to sell 8,766,547 shares through an S3/A filing that became effective on June 19, 2014. Together these shares account for 34% of CREG’s total outstanding share count. We believe it will be difficult for the stock to support the potential sale of these shares when given the fact that the stock’s average trading volume over the last 3 months has been around 95,000 shares.

Share Purchase Agreement (“SPA”) Agreement Terminated

According to the Form 4 filed yesterday after market, an institutional owner of CREG shares, Carlyle Asia Growth Partners (“CAGP”), sold 200,000 shares at price of $2.00.  After the transaction CAGP still owns 12,265,938 shares of the company which constitutes roughly 20.1% of the company’s total outstanding shares.

Recall that on August 28, 2013 we published an email note to premium members highlighting the details surrounding CAGP ‘s intent to sell its entire position in CREG to Great Essentials, Ltd through a share purchase agreement. Here is our original note:

“CREG filed an SC 13D/A this morning.  The filing disclosed that a private equity firm, The Carlyle Group, that  provided financing ($21.8 million) for the company around two years ago is in the process of selling its entire CREG position (12,265,938) to another entity.  This transaction works out to a price of $1.75 per share.”

The original terms of the share purchase agreement  announced on August 28, 2013, called for Great Essentials to purchase 12,465,938 shares in two tranches with four installment payment periods:

Period 1: on or before August 31, 2013, $1,000,000.00;

Period 2: on or before November 30, 2013, $2,000,000.00;

Period 3: on or before February 28, 2014, $2,000,000.00;

Period 4: on or before May 31, 2014, $16,815,391.50.

On June 16, 2014 CAGP filed a 13D/A, basically disclosing that the original SPA has been terminated and that Great Essentials is only honoring part of its original obligation by purchasing just 1,142,857 of its CAGP’s 2,465,938 CREG shares.

“On June 9, 2014, Carlyle Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P. (together, the “Carlyle Entities”) terminated the share purchase agreement (the “SPA”) with Great Essential Investment, Ltd. (“Great Essential”), dated as of August 25, 2013, pursuant to the terms as set forth in the SPA. Pursuant to the SPA, the Carlyle Entities agreed to sell to Great Essential and Great Essential agreed to buy from the Carlyle Entities a total of 12,465,938 shares of common stock of the Issuer in two tranches, representing the Carlyle Entities’ entire share ownership in the Issuer, at a total purchase price of $21,815,391.50. The SPA remains in effect so far as it relates to the obligation of the Carlyle Entities to sell and Great Essential to purchase the first tranche of shares, consisting of 1,142,857 shares in the Issuer.”

Since the announcement of the SPA, the share price of CREG reached a high of $6.05 on March 24, 2014, which is more than triple the agreed average SPA transaction price of $1.75.  Given that the average price of the SPA transaction was $1.75 per share and that CREG shares tripled since the time of the original SPA, we are speculating that Great Essentials wants nothing to do with CREG. We are curious if Great Essentials performed its own due diligence and reached some of the same negative conclusions as we did. Great Essentials theoretically left millions of dollars on the table. We are also curious as to why it appears that CAGP wants out of CREG when it is allegedly selling at such a low valuation (Non-GAAP P/E of 6.3).

Pucheng Xin Heng Yuan Biomass Power Generation Corporation Registers to Sell 8,766,547 Shares of CREG , Its Entire Position.

On September 5, 2013, CREG’s wholly owned subsidiary bought Biomass Power Generation Systems from Pucheng Xin Heng Yuan Biomass Power Generation Corporation (PBPG). The transaction was valued at 16.48 million dollars and was completed through the issuance of 8,766,547 shares of CREG to PBPG:

“On September 5, 2013, our wholly-owned subsidiary, Xi’an TCH entered into a Biomass Power Generation Asset Transfer Agreement (the “Transfer Agreement”) with Pucheng Xin Heng Yuan Biomass Power Generation Corporation, a limited liability company incorporated in the PRC (the “Selling Stockholder”). The Transfer Agreement provided for the transfer and sale, from the Selling Stockholder to Xi’an TCH, of a set of 12MW biomass power generation systems (the “Transferred Assets”). As consideration for the Transferred Assets, Xi’an TCH agreed to pay the Selling Stockholder RMB 100,000,000 (approximately $16.48 million) in the form of 8,766,547 shares of our Common Stock (the “Shares”), at a price per Share of $1.87.“

On June 13, 2014 CREG filed a S3/A that went effective on June 19, 2014, allowing PBPG to sell 8,766,547 shares of CREG.

We don’t see PBPG’s willingness to possibly sell at current prices as a sign of confidence in CREG.

Conclusion

We will keep tracking this story and provide relevant information, if any, in the future regarding recent developments.  In the meantime, the potential open market selling of CREG shares by two of its large holders constituting 34% of CREG’s total share count could be an indication that CREG shares will continue their descent.

Disclosure: Short CREG