Tuesday, October 19, 2010

Xingquan's TDR

  • mosea said...
    You have mentioned about Xingquan in the past. What or how do you see its recent ambitious foray by listing in Taiwan through TDR?
The past postings on Xingquan:

On Star Business: Xingquan plans to sponsor issuance of Taiwan depository receipts programme

  • Xingquan said the proposed programme would involve the issuance of TDR to investors in Taiwan that represented up to 46.099 million new ordinary shares of 10 US cents each in Xingquan, representing 15% of the existing issued and paid-up share capital of Xingquan.
  • The proposed TDR programme was expected to rake in about RM76.06mil based on the indicative issue price of RM1.65 for each underlying share, it said.
  • “The proceeds will be used for the expansion of sales and distribution network (RM44.55mil), point-of-sales makeover as part of the rebranding exercise (RM26.51mil) and the balance as expenses for the proposed TDR programme (RM5mil),” it said.

Pricing is 1.65.

Shares will be diluted by 15%. ( Xingquan's share will increase from 307,330,000 to 353,429,500 )

Company will rake in 76 million from this exercise.

I am puzzled as usual. :P

It's a fund raising exercise which will dilute current shareholder's earnings by 15%. ( To be more exact and precise, the TDR will list end fy 11, which means the dilution of earnings will only be felt in 2012. )

In the posting, Regarding Xingquan , there's still plenty of money raised during Xingquan's IPO which had not been utlised. ( see table here ) and as highlighted in that posting, Xingquan also wants to expand and expand. So despite the huge cash left ( see posting Quick Review Of Xingquan's Earnings ), apparently the cash is not enough.

Hence this TDR.

And apparently, CIMB is very positive on this news!

So positive that Xingquan's share price target is raised from 3.12 to rm 3.49. :P

Here's the screen shot.



Now I am puzzled... yet once more.

CIMB acknowledged the fact the earnings per share will be diluted come 2012.

Now check out the earnings forecast. Xingquan is projected to see its net profit grow from 105.2 million in fy 2010 to 150.7 million in fy 2011. That's a 43.2% growth.

:P

But the valuation is not based on this super growth!

:P

It's based on 2012 earnings.

Which means Xingquan's earnings will grow by another 13.1% to 170.4 million!

Yes!

CIMB is saying Xingquan is worth so much because it's earnings will grow from 105.2 million to 170.4 million!

This is what CIMB is basing its valuation of Xingquan upon. ( Err.. come 2 years... will anyone remember this at all? :P )

Anyway... check the eps row. Apparently CIMB have not considered the 15% dilution of eps. How? Would you consider the dilution of eps now? Or wait till 2012? :P

Well if I take 170.4 million to be the holy grail and use 353 million as the share base, Xingquan's diluted eps should be 48.3 sen. And a 6x earnings multiple = ...... ?

Xingquan last traded 1.64.

10 comments:

Mac said...

Hi, I do agree that to certain extend private placement means that earning will be diluted especially the company is load with cash. It definitely make the shareholder wonder the purpose of this. But I think the TDR will provide a chance for Taiwanese investor, perhaps some institutional investor, to invest in the company which could lift the confidence of local investor towards company. It may be the main reason of the TDR as managment strongly expressed their disappointment over the undervalue of the stock in local bourse. How do u think?

snowball said...

Hi Moolah,

Part of the reason to have a TDR, apart from raising cash, is due to perhaps the low valuation that Malaysian investor attach to their shares. That's why you see those s-chips want to have dual-listing in HK and Taiwan.

However, should the management care about temporary stock valuation? If the company is good, in the long run, the market will value it properly. So, should Xinquan management risks dilution so that it shares can be properly value in the short run? This reminds me of BYD, Buffett intially want to buy a bigger stake in company, but, Wang Chuan-fu decline because he know that his company is good, hence, unwilling to give so much of his good company to Buffett. Then, why is Xinquan management giving so much of their company to other people if they think their company is good?

A probable reason for the need for high short term valuation is that, Xinquan may want to keep the share price as high as possible, so, when they want to do a rights issue, they dilutive effect will be less. This is always the problem facing small Chinese firms, they have limited access to credit, so, private placements and rights issue are their only means to raise cash.

mosea said...

Dear Moolah,

Thank you for your update and view. I am equally puzzled as to the apparent urgent need to raise cash by Xingquan too. Having said that, Xingquan has also came up with some reasonable reasoning saying that it would provide them the opportune to have a foothold in Taiwan as well as instilling greater confidence among Malaysian investors and all.

The jury is still out on Xingquan?

Moolah said...

snowball: IMHO, I think it's not fair to make that comparison between Wang Chuanfu's BYD and Xingquan. This is like saying all chinese companies are the same.

Anyway, there was a rather interesting news on BYD the other day.

http://www.bloomberg.com/news/2010-10-13/byd-factories-confiscated-after-land-ministry-fine-update1-.html

Anyway, in regards to Xinqquan's TDR.

If I am a shareholder, I would ask if this proposal makes sense or not. Do I want to see the future dilution in earnings?

Is the low valuation reason a justification? Why didn't the company list in SSE instead? Why list here and only to complain about low valuation?

And during its IPO, if you refer the other posting Regarding Zingquan again, you would note that folks like OSK and CIMB were already valuing it based on low earnings multiple. And it was a known fact too that S-Shares in Spore also traded at an extremely low multiples.

ronnie said...

Snowball is to an extent right. Malaysian investors do not do justice to Xingquan's share price. It is not to say that Taiwanese retail ivestors are more discerning fundamentally. They are in fact more speculative and are expected to speculate in this grossly undervalued stock. The price leadership of the TDR is expected to provide impetus to the share price on Bursa.

Moolah said...

ronnie: the issue is simple, why should these chinese shares in m'sia trade at a much higher valuation than the S-shares?

And since the low s-shares valuation is a known factor, why did these chinese companies chose to list here? And now they complain about low valuations?

Some would rather be err by being sceptical. Would it be wrong?

:=)

snowball said...

Hi Moolah,

I think you misunderstood me. Most probably cause I write too much and indirectly :)

I am actually questioning the reasoning why Xinquan management need to care about short term valuation of the company. Because, if the company is good, in the long run, it should be valued properly. So, as the management are in it for the long run, they should not care about short term valuation. The only probable reason they may want to keep short term valuation up is perhaps they are looking for another rights issue and private placement in the near future as Chinese small firms access to credit is rather limited. So, shareholders should watch out for further rights issues and private placement in the future.

As for why they don't list in SSE (which I presume you means shanghai stock exchange) or HKSE which will command a higher premium, they are simply too small to qualified to list there. So, KLSE is probably their only choice.

Moolah said...

LOL! Don't worry. It's me.

Quote: I am actually questioning the reasoning why Xinquan management need to care about short term valuation of the company. Because, if the company is good, in the long run, it should be valued properly. So, as the management are in it for the long run, they should not care about short term valuation.

Now I fully agree with you and if ever you read up all the news coverage, the main focus is that Xingquan is unhappy over its valuations and as mentioned earlier, this is something I do comprehend. The low valuation risk was there from day one. S-Shares too trade at a low valuation. So if the management is so concerned about share price, why didn't it list in SSE instead?

Quote: The only probable reason they may want to keep short term valuation up is perhaps they are looking for another rights issue and private placement in the near future as Chinese small firms access to credit is rather limited. So, shareholders should watch out for further rights issues and private placement in the future.

I do not quite agree. :P

For starters, Xingquan raised some 164.577 million from its IPO listing and Xingquan is raising another 75 million from this TDR thingeeee.... so my dumb question is why on earth does Xingquan wants to raise so much money???

Their last reported earnings pdf here (see pg 13), out of the 164 million raised from the IPO, only 107.518 million had been utilised. Some 57 million or some 34% not used. So why so fast raise another 75 million??? I cannot understand such business. Sorry.

Moolah said...

Another dumb issue I have is why does a shoemaker require so much capex?

snowball said...

Hi Moolah,

Small and medium Chinese company in general like to hoard a significant amount of cash. This is my general observation of S-chips, Red Chips etc. The cash hoard is for strategic reason because of the limited access to credit facilities in China.

So, in Xinquan case, the management may want to keep some of the cash for strategic reason either to react to competitor actions or to face possible uncertain regulatory environment. That's why we are seeing chinese companies listed abroad raising doing so many rights issues despite being on net cash.