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  • floppy_6 floppy_6 Jul 15, 2010 11:05 PM Flag

    Shelf registration

    1) First of all, shelf registration is only a procedure, often to be ignored due to 1) many of shelf registration does not come to actual offernings, 2) even they actually issue offering, that probably could be months or even years behind it. So shelf-registration had never been paid so much attention to as SDTH this time. We paid so much attention on this registration probably due to two reasons - 1) Bad timing among a shaky worldwide equity market. 2) The company has been overly honest in explaining the intention to retire existing convert. Otherwise, 99 of 100 shareholders of us wouldn't even notice the put option in existing convert.

    2) Does SDTH need entire amount of $150 million?

    $150 million is only randomly thrown in, actual amount could be anywhere between zero to $150. In the previous post, I was expecting the company still has $60 millions left even they choose to pay off the convertible from cash available and cash generated from operation. SDTH expects to have 300,000 tons capacity by the end of 2010. Assuming they expect to repeat growth rate this year - that is to expand 20% capacity in 2011, then they need to add 60,000 tons capacity in 2011. Taking the average expansion cost between An-Hui and Shandong (that is $6 mil per 10,000 tons), then SDTH needs to set a capex budget of $36 million in 2011, which seems either can be coverd by cash left on hand ($60 mils) or a small offering of $40 million.

    3) Maybe the company's plan is much more aggressive than above including NPCC massive expansion and/or buy another chemical company. Let us assume that SDTH fully issues $150 million convert with $120 millions for NPCC expansion and $30 mils for working capital. LET US SEE THE EFFECT BEING DILUTIVE OR NOT?

    If $150 million is to be set with conversion price of $6, then it could result in 25 million additional shares vs. existing sharecount of 54 million (total 79 millions), diluted effect is about 1/3. $120 millions expansion budget is enough for 200,000 tons. This turns 300,000 tons capacity into 500,000 tons capacity. Before offering, every 1000 share owns 5.56 tons capacity (300,000 divides by 54,000 thousand shares). After offering, each 1000 share owns 6.33 tons capacity (500,000 divides by 79,000 thousand shares). There is no reason to susepct the profit margin could decline after line expansion. Consequently more line capacity owned (6.33 vs. 5.56) per thousand shares after expansion is a solid proof that this offering is not dilutive but accretive.

    Conclusion: On the count of above scenarios 1) to 3), none of them are actually dilutive to SDTH unless the following happens.

    1) SDTH couldn't fully utilize the additional 200,000 tons line. I will argue if they can't find the use for the additonal 200,000 tons line, they wouldn't proceed the offerings. For PE alone, it is 350,000 tons need plus asphalt 100,000 tons.

    2) Other unknown negative factor exists - well, not to my knowledge from the last conversation with Andrew Chen.

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    • can someone explain to me what the convertable debt issue is with this company. how dillutive is it? is it already set at a price? can they retire it without going through with it? thanks,

    • what does CKSW stand for?

    • Excerpting from CKSW's conference call pertaining to shelf registration -

      "Let me say a few words about the shelf registration statement we filed in April for the sale of up to 15 million shares which under SEC rules is effective for three years. We undertook this registration to give us the flexibility to raise money quickly from time to time whenever opportunities and the need arise. This is quite common practice for public companies.

      Also keep in mind that when the need to raise money presents itself, it just makes business sense for us to first utilize the cash reserve and access to credit line before we resort to the shelf registration vehicle. I would like to add further that based on our knowledge of the business opportunities in the market, we currently believe that if if at all we use the shelf registration vehicle, it is very likely that we will draw on only a small amount of the full 15 million shares."

      There is really no need to get excessively excited on shelf registration. It is simply a procedure. Share amount or dollar amount doesn't mean anything, they simply "reserve" in a largest number there just in case some golden opportunity arises.

    • Let me just a few observations regarding your posts, as I feel the issue of corporate financing is one of the most vexing problems facing SDTH right now.

      This shelf registration has as a backdrop a seriously bungled convertible note ofering two years ago...where it seems the only ones coming ahead were the well fed investment bankers.

      So...investors have good reason to fret this latest shelf registration.

      The convertible notes offering has turned out to be a major management blunder, for various reasons;

      1. They completely overestimated the amount of funds they would need(i.e even if the Jinan acquisition had gone forward)....and as of today none of the funds have been used. This offering has turned out to be very dilutive for existing shareholders. If you take out the effect of the notes, the EPS for 2010 should be around $.70, and $.75-$.85 for 2011.

      2. The date for the first parachute clause should have probably been negotiated farther it takes the company a lot of time to bring a new application to market, and build the corresponding infrastructure.

      3. They missed their chance to get themselves out of the hole by aggressively buying the notes back in late 2008. Instead, they opted to tiptoed into the opportunity and bought back only $25M.

      On this issue, I think management has shown their "green" colors.

      The goods news is that the company is generating close to $160 per MT in cash from operation. With investment requirements at $700-$800 per MT, the company can grow organically at a 20% clip without diluting its shares.

      On the issue of accretiveness, it is very hard for me to see how converting at $6 would be accretive for existing shareholders. There is a normal time lag between receiving the funds, and the actual deployment of these funds in a manner which increases eps. And, of course, there is the issue of fees and charges by the investment bankers, and most importantly the amount of cash management will want to "hoard" out the oferring.

      I have already e-mailed the CFO and CEO to let them know how I feel about the shelf registration.

      I hope they are listening.