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SmartHeat Inc. (HEAT) Message Board

  • truth.monger truth.monger Dec 4, 2010 5:14 PM Flag

    Why didn't HEAT borrow funds?

    I am attempting to do a bit of research to figure out why HEAT did not simply choose to borrow rather than using suspicious high-cost dilution at at $5.

    There is precedent for borrowing. From the last 10-Q (page 26) back in 2009 HEAT had taken out short term loans from a commercial bank in the PRC at an interest rate of 5.576%. That is a very reasonable rate. Certainly an ideal source of low cost capital exited for HEAT in 2009.

    If all is legitimate with HEAT we would expect the current 4th quarter to require some additional working capital while the following two slow quarters should generate enough cash to repay short-term loans as business sales slow dramatically and HEAT collects outstanding accounts receivable.

    So why didn't they just borrow some funds for the winter and repay it in the summer?

    Things start to look a little fishy if dig into the balance sheet. Start from Sep 2009:
    http://www.sec.gov/Archives/edgar/data/1384135/000114420409059256/v166407_10q.htm

    3Q-09 had healthy revenue of 38 million and AR ended at a reasonable 20 million. AR was about half of the quarter's revenue.


    Now take a look Q3-10:
    http://www.sec.gov/Archives/edgar/data/1384135/000114420410059111/v201760_10q.htm

    Q3-10 had revenue of 51 million and AR ended at 50 million. So within just 12 months AR deteriorated from approximately 50% of Q3 sales to an unhealthy 100%. I say "unhealthy" because 2010's AR is significantly worse than 2009 and because the AR bloat apparently caused a working capital crisis that drove HEAT to dilute at a high cost to shareholders and bring management's legitimacy and motives into question.

    So why has AR as a % of revenue grown so much? In the best case customers are not paying off their debts as quickly as they used to. In the worst case, much of the "sales" are not real as HEAT fraudulently inflates revenue and grows false AR while siphoning off corresponding amounts of cash accounted for as COGs. Then after a number of years of cash raising secondaries propelled by inflated "Sales" they suddenly write off the AR and blame the "downturn" on the PRC putting the brakes on China's construction boom.

    We almost have to assume that HEAT in late 2010 is not credit worthy by PRC commercial bank standards. Apparently they could not borrow cheap cash as they did in 2009. So what happened? Either HEAT does not want commercial bankers going through its books and asking questions or they pursued the debt route and were denied leverage? Possibly because of suspect AR valuation and sales? Once HEAT was denied a debt option they were forced to issue shares no matter what the cost to current investors or management's reputation?

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    • Your analysis seems to be spot on. Have you tried to get answers to your questions from the Company or any other source?

      • 1 Reply to mgipsondurbin
      • Yes, there was no reply ever from HEAT's IR.

        I would really like to listen to the Q3 call. But they won't make it available.

        You would think given the valuation crash HEAT would be tripping over themselves to accomodate simple investor requests. Or at least try to provide the basic information that 99% of public companies provide.

        But they apparently decided to quit updating the investor site a long while ago.

    • Thanks for the analysis, Truth. Your subsequent exchange with Connor is also very interesting, as he did a credible job presenting a solid defense -- right up until he decided he wasn't going to convince you, and that you must therefore be an irrational basher, and put you on IGNORE. His error, IMHO, since HEAT's ballooning A/R is a very legitimate concern. Coupled with the recent totally unexplained secondary at a seemingly giveaway price, there SHOULD be questions in every investor's mind. Add to that the recent debacle in RINO and the terrible quarter posted by APWR, and those of us who have recently been heavily invested in the Chinese green-power, cleaner industry arena are currently both skittish and defensive -- Connor and myself included.

      None of that makes you either right or wrong in suspecting that HEAT may have being reporting some revenues that just didn't happen. So far at least, I'm willing to believe that HEAT's impressive growth rate is legit, but I'm not willing to place as heavy a bet on that as I was before. FWIW, my personal reaction to my large losses in RINO have included lightening up my portfolio allocation to Chinese growth companies in general, and to APWR and HEAT in particular. APWR and HEAT's P/Es and growth rates are indeed VERY enticing, and recently have become even moreso, but IMHO, only a fool would totally ignore the legitimate questions that investors in both companies are currently asking. Thanks again for your serious effort to understand a worrisome issue regarding HEAT.

      • 2 Replies to seustis
      • Thanks. This would be a difficult one for me to own. Upside should be more or less capped at $5 since mgmt didn't think it was worth more than that. And it could be destroyed by any Muddy Waters like fraud allegation. It is an easy target given the unexplained AR and the company's lack of communication via its investor site or it totally unresponsive IR department.

        Plus the recent irrational behavior is going to make investors scared of the inexperienced if not fraudulent management. HEAT is in the realm of day traders.

      • There are many reasons they did what they did. First I would think of is that they couold get the minimum amount they needed knowing what future orders are and did this and of course stock dropped yet they could care less as well as Barclays because they know where it is heading. Bottom line is less expensive this route and if you are a shareholder, you have either done your homwork and believe or you sell. In my opinion it was rather conservative which eliminates fishy bs in my analysis.

    • I'm not saying sell down here. I'm saying that if you bought at $5.00, you should employ risk/control and set a stop. The support was broken under $5. Right now the chart is showing a reversal of the downtrend and the strongest support is the $4.22 level..

    • thats right. just let go your shares and people are on line to take over. Im loading up

    • All this talk about HEAT's management gaining/losing money is laughable. If you're sitting with a loss on ANY stock, its your fault. There's no reason to stay in a stock while it goes against you. Just close the trade and move on. Use you time and energy towards finding another opportuntiy instead of pointing the finger.. Quite honestly, it doesn't matter if HEAT is a great company or not. The price is what it is.. The stocks can remain irrational longer than you can stay solvent..

    • i think you deserve some credit for your fair criticism here. +

    • You miss the point - management could have and should have called off the secondary offering once the share price was too low. That is what responsible mgmt does all the time.

      Instead HEAT made it clear they do not care about share holders, dilution, or the common valuation. They just wanted cash they never have to repay.

      We just gave these irrational people 25 million more to squander on "AR" which they won't explain.

    • HEAT should have made the offering in January, obviously. Legitimate management does not offer stock when it believes the company is undervalued.

      Also note that HEAT was near $8 before this desperate act. If the valuation goes down the responsible thing for a legitimate company to do is pull the offering off the table.


      HEAT chased it down into a valuation hole. Why? It smells like a fraud.

    • It is shorts who wiped out the share-holder value. You are share-holder's enemy.

      Put you on ignore. PERIOD.

    • Shorts sold it down to $5.5, and said they should offer at $15......LOL

      It is not the company who wiped out the share-holder value. It is the shorts who did it.

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