Headquartered in Shanghai, China, Molecular Data Inc. (MKD) is a technology-driven platform operating in the Chinese chemical industry. It offers e-commerce, financial, warehousing and logistics solutions to several companies, thereby connecting them along the chemical value chain.

MKD’s shares have slumped 81% in price over the past year and 20.7% over the past six months to close Friday’s trading session at $0.23. 

Despite the booming global chemical industry, shares of MKD have been retreating due to concerns surrounding their potential delisting from U.S. stock exchanges given the SEC’s increased scrutiny of  Chinese ADRs.

Here is what could shape MKD’s performance in the near term:

Equity Dilution

Last September, MKD sold 23.39 million common units, each comprising one ADR and one warrant, at $0.38 each to institutional investors. The company also sold 16.08 million pre-funded units, each containing one pre-funded warrant and one purchase warrant through this direct equity offering. The warrants are exercisable for up to five years from the date of issuance.

MKD raised $15 million in gross proceeds from this offering, which it plans to utilize to fund its general corporate expenses and working capital. However, its total outstanding shares increased significantly through this offering, thereby reducing its earnings per share and return on equity. Furthermore, its share capital is expected to be further diluted as warrants are exercised over the next few years.

Non-Compliance of Nasdaq Marketplace Rule

Last November, MKD received an extension of an additional 180 days (until May 23, 2022) to regain compliance with Nasdaq’s Minimum Bid Price Rule. The company’s shares are required to trade at a minimum price of $1 for at least 10 consecutive days to remain listed on the Nasdaq Capital market. The stock closed the last trading session at $0.23.

MKD previously received a notice from the Nasdaq stock exchange in May 2021 regarding non-compliance with the Minimum Bid Price Rule. The company was granted 180 days to regain compliance until Nov. 22, 2021. However, the company failed to regain compliance during that period, following which it was granted an extension. MKD announced its plan to administer a reverse stock split, if necessary, to regain compliance.

POWR Ratings Reflect Bleak Prospects

MKD has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

MKD has a grade of D for Stability and a C for Quality. The stock has a maximum drawdown of 36.67, which is in sync with the Stability grade. In addition, the company’s trailing-12-month levered free cash flow margin of 1.32% is 72.9% lower than the 4.87% industry average, justifying the Quality grade.

Of the 96 stocks in the Chemicals industry, MKD is ranked #87.

Beyond what I have stated above, view MKD ratings for Growth, Sentiment, Value, and Momentum here.

Bottom Line

Despite being an award-winning tech-driven platform, MKD’s trailing-12-month profit margins are negative, while its trailing-12-month revenues slumped 63.1% year-over-year. Furthermore, shares of MKD listed on the Nasdaq stock exchange are at the risk of delisting because the company has fallen afoul of the exchange’s Minimum Bid Price Rule. Thus, we think the stock is best avoided now.

How Does Molecular Data (MKD) Stack Up Against its Peers?

While MKD has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, Valhi, Inc. (VHI), ICL Group Ltd. (ICL), and Mitsubishi Chemical Holdings Corporation (MTLHY), which have an A (Strong Buy) rating.

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