Replies to post #78795 on China Growth Stocks

[bradford86]

China Crash - Begins Today - I'm going to go ahead and say that today is the turning point for the global consensus that China is a growth engine, producing things that are of value. Real estate is the largest bubble in the world right now, and China is at the top of the bubble. Fake it till you make it isn't always the best policy.

Concept:
There is a difference between being busy and being productive.

Sentiment: Negative.

[Koufax]

CCCL I'm not sure that CCCL wants to do another offering. Thier most recent 20F said, for the first time, "We believe that our working capital will be sufficient to meet our present operation needs and the commitments and capital expenditures in the foreseeable future, together with expected cash flows from operations." Prior to that, they always warned of the possible need to raise equity.

Maybe this new sentence is BS. Maybe there will be further needs for capital expenditures. Maybe these capital expenditures are 40% graft, paid to Swiss bank accounts of the CEO. But the company's SEC filings seem to say that there won't be another offering, which undercuts some of Rato's argument.

[skier1]

CCCL-Here are the facts:

1) P/E:At the time of the deal in Nov 2009, stock was valued at $9.70. The proforma historical EPS was $1.19 and book value was $8.23, (assuming no redemption in the SPAC) and $2.0 EPS and book value per share of $6.81 assuming (75% redemption), implying P/E range of 8.2X to 4.9X and Price to book value range of 1.2X to 1.4X. Forward 2011 P/E multiple was 5.6 X(assuming 33% redemption, no warrants repurchase) and 4.4X, assuming (75% redemption, no warrant repurchase)

2) As people who have followed SPACs know that hedge funds were using SPAC's as money mkt alternative and voting every deal down, which resulted in the 75% redemption being the outcome, which was not what the target had expected a the onset of the deal. That resulted in the company having at close only $13MM of cash and $35MM of debt and cap ex requirements of approx $29MM in 2010 and $44MM in 2011.

3) Out of 8.95MM shares outstanding at closing, the Sellers received 5.7MM shares of common stock as consideration valued at $55.7MM plus contingent shares of 8.2MM upon reaching performance criteria worth on a contingent basis $79.5MM. The sellers had 64% of the equity at closing and public shareholders had 22% and SPAC founders had 12%. If performance thresholds were met, the Sellers ownership % would increase to 81%. Warrant exercise net of cash would have changed the % ownership to 43% but brought in $116MM of cash, but in hindsight as they exchanged most of the warrants(out of 15.5MM warrants only 2.77MM are outstanding) subsequently, warrants don't end up being that material. 2009 forecasted earnings for the company were $23.7MM. If the founders believed that earnouts will be vested, they gave up approx 20% to 25% of the company to be public, have approx $15MM of cash, the ability to raise the money to fund their cap ex plans. Not crazy, considering there was no mkt for sub $100MM mkt cap ipo's in HK or China at that time and they were already tapped out on bank facilities. Plus the time required going through a traditional IPO vs. SPAC would have jeopardized their ability to buy Hengdeli.

4)In Nov 2010, they issued 3.35MM shares raising $26MM at $7.75 per share. This raise gave much needed liquidity to the stock, pre this deal the float was less than 2MM shares and wall street coverage. Let's say the "fair price was $5 per share higher, for giving up $16MM in value, they accomplished liquidity, coverage, a much strengthened balance sheet, a fair investment imo. At Dec 31, the Company had $40MM of cash and $15MM of debt. The Company needs to spend $44MM in capex in 2011. It has stated that its existing cash and cash flow from ops should be sufficient to fund its capex, and with earnings of $44MM in 2011 and cash of $40MM, it seems quite reasonable. The Company should be generating a lot of free cash flow after 2011, as major capex would be done by then.

When a company is cash constrained, needs $30MM of capex to upgrade its existing ops and $40MM of capex to fund its acquired factory capex, p/e is not as valid a valuation measure. Book value is more relevant, imo. When earnings approximate cash flow, as they would post 2011, they become more relevant. If I was the owner of CCCL, i would have done both equity raises. The existing facility needed $30MM of capex and acquired facility needed $40MM, how else would they get funded? They already had $30MM of debt post acquisition. Without the equity deals, they would have remained a small size regional player with outdated facilities, as opposed to the much stronger position they are in now, with a much strengthened competitive position.

Also, i think generalizations like "companies from this province are fraudulent" or extrapolations like "CCME had a big 4 auditor or equity sponsor and they turned out to be a fraud" are not logically cogent arguments. Each situation is unique and has to be evaluated on its own merits. As I have said before, I believe the current weakness in stock price is related to some institution/s getting out of the space and not indicative of due diligence uncovering some fraudulent activity.