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  • stockguru Dec 9, 2010 10:47 AM Flag

    Think about it, if they didn't run low on cash

    they wouldn't have done this

    so in my view this is very negative for the company

    they just diluted your drink with water and you guys didn't even know it

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    • One claification BTuff -- dilution is in two forms -- A)ownership % and B) financial flows (cash & EPS) per share. My answer re:"minimal/no dilution" was directed at the former (ownership)criteria. On a EPS/Cash Flow dilution basis -- in my opinion there will be absolutely no dilution because the incremental (future projects which use the incremental placement cash .. which is minimial) cash flow & net income generated by the new capital projects and lowered existing cost structure (lower interest cost on existing note) will throw-off higher rates on the incremental new shares (versus what was being generated for the older shares on prevailing operations). Thus, the enlarged current placement (by either $28 million guaranteed and possibly another $30M or $58M total if the excess placement is subscribed to) would offer accretive flows to existing shareholders. As I said previously though -- I'd prefer straight debt at a higher coupon. I believe the lowest incremental cost-of-capital (given their proven bus. model & future prospects) is straight debt at the moment. I'd prefer not to offer any "conversion" rights ... but that's because we are very bullish on the future operating prospects of SDTH .... thus, straight debt is a much cheaper option ... but others may believe we're not assigning an adequate "risk-premium" to the C-O-C analysis... and therefore a hybrid, like the current Convertible Debt Placement is a cheaper route. Either way, the Market reactions today was a simple overreaction to an event without understanding it wasn't even a material event. We've expected this for months .... and the timing was good in order to lock-in lower financing rates .... giving us a buying opportunity today. Hope this helps.

    • BTuff -- thanks for "baiting" me to answer a question I'm burning to comment on -- however, I'm an old Princeton/Wharton MBA so I can go off on technical tangents!

      There will be absolutely ZERO dilution with the current Placement with on caveat. The only dilution will likely occur once the current equity price rises by approx. 50% (and 96% at the current $5.07 price if the option price is maintained in the new note) ... and then the Noteholders would have the option to convert the debt/notes into shares at the highly escalated conversion price. The current note was issued on May 28th, 2008 when the share price was $7.91 ... and the conversion price was set @ $9.94/share (26% above prevailing price). I expect, since the SDTH balance sheet & cash flows are much stronger now and the general credit rates in China are also lower for accomplished industrial placements (versus 2008)-- the "option" price (if offered) will be at an elevated conversion rate much higher than 25% above the prevailing price. Thus, in summary, the dilution, if it occurs will happen only once the share price has run 25-50% higher ... and then the SDTH balance sheet will effectively eliminate the Liability/Note cash-free. Frankly, I'd prefer they issue just straight debt and pay a slightly higher coupon-rate on the notes ... versus giving up an equity conversion option. Your question is spot on -- the true analysis is to lower the embedded, after-tax cost of financing (assumming approprite risk-adjustments of equity vs. debt). As long as the after-tax cash-flow of the incremental project exceeds the incremental cost of financing (however structured) .. you move forward with the project. BUT THIS IS A LONG-TERM TECHNICAL?FUNDAMENTAL analysis which will only prove-out in the long-term. Unfortunately, in these smaller-cap equity issues the institutional folks aren't their to hold up the BID when these crazy runs like today occurred. In my initial career days back @ Goldman in the mid-80s we would have been scooping up as much "size" as we could when SDTH broke the mid-$5 range today. But in those days we never really got involved in equities this small. The current FUNDAMENTAL valuation of SDTH in the low $5 range is a steal !! Even if you assign a 30% sovereign (PRC) risk factor to the valuation comps. That's why we picked up another 27-28K shares today. We have the patience to watch this one play-out. Thanks for the question.

    • You're totally off base. This has nothing to due with the company running low on cash, and it's not a negative. You must be new to the stock. Do your due diligence and learn more about this company and then we can talk.

    • Doing an offering doesn't tell you much by itself, in my opinion. It's what they do with the money that determines whether it's a positive or a negative.

      If you use the money to retire more expensive debt, for example, that's a positive. If your return on capital is higher than your cost of capital, that's a positive also. Time will tell.

    • No one believes you...long this thing for years...made a profit...C'MON

    • No, it is legalized gambling.

    • there are no large numbers of hand wringing scared holders selling, it is pure computer driven push button selling on news. Much of the market is run by computer buy and sell programs. IMO, the market has become a computer program.

    • They are generating over $10 million in cash per quarter from operations. The +1 ratio of cash from operations/earnings, speaks to the quality of the company's earnings.

      CapEx spending is going towards expanding its operations that will in-turn generate even more cash flow.

      This is a fast growing Chinese company generating cash (NOT ACCRUALS) and it is audited by KPMG. If someone wants a safer way to invest in a China small cap. This is it.

      Just sayin

    • You know they are expanding their production?

      What is your reasoning on why this will drop to the low 4's?