ZK International: A Blockchain Play for IoT and Supply Chain Management (NASDAQ: ZKIN)

Our thesis is clear: we think this company is undervalued and is a buy and hold. It is unfairly covered up and overlooked due to its location in China. COVID was a seemingly devastating event for China-based companies, but many turned it into a positive one. ZK International (ZKIN) has since launched an exciting blockchain project that adds further value to their profits. In this article, we will dive into these topics and more. First, on the exciting developments of the blockchain.

Since 2018 ZK International has been working on a research project to build blockchain systems, a project they call xSigma. Recently, they announced a new partnership to promote this program:

The Company’s mission is to drive the adoption of decentralized technologies by researching, analyzing and testing innovative concepts and use cases. By finding new ways to use blockchain, xSigma will seek to revolutionize traditional industries and make financial instruments more accessible. The goal is to build a product ecosystem that realizes the true potential of blockchain in promoting open access and financial inclusion around the world.

There are virtually no large-scale competitors in the industrial systems blockchain market, and none of them are publicly traded. ZKIN has an existing business which makes the implementation of a technology like blockchain suitable.

What is key to note is that they are not raising money or making a “token raise”, but are spending their profits on built technology. This is always a positive sign, as many of the problems surrounding failed blockchain projects usually have to do with fundraising. Cap Raise and Crypto should not be used in the same sentence. Here we have an industrial manufacturing company that is investing in technology research and development. Imagine some of the possibilities: pay your water bill in Crypto, in a blockchain-based billing system tied to sensors that know how much water you’ve used. Water usage can be monitored via IOT sensors and stored on the phone and paid for monthly via app authorization using Bitcoin or another cryptocurrency.

Or imagine the fusion of decentralized finance (DeFi) with industrial components – the possibilities are endless. Smart contracts could be combined with engineering logic – for example, instead of signing contracts, you simply pay by usage for the systems you use on a daily basis. Once verified via device, pay 0.01 for a sip of water at a public fountain or hotel bill via self check-in. Cities are being redesigned as “smart cities” and ZKIN is a manufacturer of one of the most important components of cities – pipes. Pipes provide water, the most important substance for human survival (we can live without electricity, although it would be unpleasant – we cannot live without water). The human body is 85% water, including the brain!

xSigma is a research project, so no one knows where it might lead. These ideas are just speculation, not an overview of what exactly they are developing. The point is, the possibilities are endless.

More background

The Internet of Things (IoT) describes the connection of any device to the Internet using integrated software and sensors to communicate, collect and exchange data with each other. The definition of the Internet of Things has evolved due to the convergence of multiple technologies such as real-time analytics, machine learning, commodity sensors, and embedded systems.

Blockchain is the management tool. So think about it, ZKIN has built water piping systems for stadiums, schools, commercial buildings and other large-scale properties. Imagine being able to track every last drop of water in a piping system or being able to have thousands of sensors that test for impurities. That information could be fed into a computer system for analysis and be used for Blockchain applications.

But can an industrial company switch to digital finance in a strategic way? Let’s take a look at the Overstock.com (OSTK) example. Overstock.com started as an online retailer like Amazon (AMZN) and made a pivotal point in the Blockchain space which has led them to their current t0 offering. This has been a plus for their business, just look at the stock chart:

YCharts data

It certainly makes sense for a successful company to develop technology as a top-down rather than bottom-up, bottom-up growth model. So if it worked for Overstock.com, why not for ZKIN? In an interview for Zanbato, Palantir co-founder Joe Lonsdale said that the disruptive companies of the future are not necessarily startups but companies that augment technologies to create something disruptive. This is exactly what is happening here.

Let’s take a look at the ZKIN stock chart:

YCharts data

Update on financial data and earnings

ZKIN has had a good year, but most encouraging is the upward trend in revenue growth.

In 2017 the gross profit was 13 million, 2018 18 million, 2019 15 million, 2020 so far 17 million. Total turnover increased from 44 to 54 to 63 to 59. This is a strong indicator of growth. Don’t forget that 2020 was the year of COVID and this company is headquartered in China (although it operates globally).

On September 4, 2020 they announced record revenue of $ 40.17 million, a 27.4% increase for the first half of fiscal 2020.

Financial highlights for the first half of fiscal 2020

		For the six months ending March 31,
($ million, except for sharing data)		2020		2019		% Change
Income		$ 40.17		$ 31.54		27.4%
Gross profit		$ 3.21		$ 8.08		-60.3%
Gross margin		8.0%		25.6%		-17.6 per person *
Income from operations		$ 0.34		$ 4.53		-92.5%
Operating margin		0.8%		14.4%		-13.6 per person *
Net profit attributable to ZK International		$ 0.09		$ 3.84		-97.7%
Diluted earnings per share		$ 0.01		$ 0.23		-95.7%
Net book value per share		$ 2.66		$ 2.63		1.1%
* pp: percentage points

They were able to continue their business, even though the Coronavirus was devastating for China. In fact, they have received awards for building piping systems in some of the new facilities designed specifically for COVID patients. It actually appears that COVID has been a blessing in disguise for ZKIN, leading to more contracts, such as a strategic partnership with Dianshi:

In April, we entered into a strategic partnership agreement with Hunan Dianshi Decoration Design and Engineering Co. Ltd. (“Dianshi”), one of the leading DIY and interior design chains in Hunan Province with approximately 3,000 employees.

And more recently, in October 2020, ZKIN signed a partnership with a major Chinese real estate development company, with plans to build hundreds of buildings that will need piping:

On October 19, 2020, the company was approved as a qualified supplier to Suning Real Estate, which now offers the company the ability to increase order flow by being able to supply stainless steel piping products to all Suning projects across the China. Suning Real Estate branches are free to order products from the Company without the need for their own evaluation. Suning Real Estate’s development plan calls for the construction of 50 Suning Squares, 300 Suning.com Squares and 100 luxury hotels in the future.

Competitors

If you look at ZKIN’s competitors, they are mostly large caps engaging in many other businesses and not based in China. Perhaps that is why ZKIN is in such a good position that it has allowed them to gradually rise to the surface, having good positive pressure. Competitors include Parker-Hannifin (PH) Watts Water Technologies (WTS) crane (NYSE: CR) Barnes Group (B) Mueller Water Products (MWA) Helios Technologies (HLIO) Sun Hydraulics (SNHY) and some small players.

Let’s take a look at Parker Hannifin’s biggest competitor. Parker Hannifin also operates in the aerospace industry and many others. Parker Hannifin’s aerospace division, Parker Aerospace, designs and manufactures aerospace hydraulic equipment. It is an aircraft parts supplier for aircraft manufacturers, including fuel system components and high temperature relief valves. While a PH-sized company that’s $ 33 billion can easily compete with a ZKIN-sized company in terms of dollars and other variables, they’re not quite as agile. They have 57,170 employees and are engaged in so many things that they are not conquering all of these niche markets that ZKIN pursues. Furthermore, accessing the Chinese market is not easy and ZKIN has many growth prospects nationwide.

The flip side of the trade war is that it has greatly benefited Chinese domestic companies. It is better to be a big fish in a small pond than a small fish in a large pond. The United States and Europe are large but also very competitive markets. We think ZKIN is in the right place at the right time, and based on their NASDAQ roster, we are able to catch it.

Conclusion

Based on Blockchain’s pivot and fundamentals, we believe ZKIN is a good long-term buy and hold. Last year we wrote an article about the company, with a completely different topic (based on evaluation only). Everything we explained in that article, such as the strong revenues and low P / E ratio, is still true. When you add their pivot into Blockchain from an industry perspective, we believe this stock is rising.

Disclosure: They are / we are ZKIN long. I wrote this article myself and express my views. I don’t get any compensation for this (other than Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.