Thursday, August 03, 2006
ETLT cash restrictions
I just wanted to document my opinion about ETLT's cash on hand. The cash is restricted to China, which to me is not as big a deal as some people make it out to be. I strongly suspect the restrictions will ease over time and while a direct conversion isn't possible, there's always a way (I was talking recently to an American working in China who knows a guy running a small business and that guy jumps through a lot of hoops, but manages to do it). If I own a company with a huge pile of cash, what happens if I sell that company to some business that needs Chinese cash? Or maybe I spin off a company that consists of nothing but Chinese renminbi and sell it for dollars. I get their dollars, they get my renminbi. I'm sure it's not quite as simple as that (there are probably many issues), but I can think of a lot of worse places to have my cash locked up than a country with 1.2 billion people and an economy growing at 10% per year.
In my opinion, the reason to discount the cash is not because of the restrictions on currency exchange but because where it's going to end up. The company has stated that the cash will be used to fund a business venture that will return what appears to be only about 5% per year on the investment. The plans of ETLT would be at least as difficult to overcome as the Chinese restrictions, and the result is far worse. However, I still believe ETLT is a good investment at forty something cents. Just add up the expected future earnings.
Give me a million dollars worth of restricted renminbi and I guarantee you that I'd get a reasonable return on it after some work, and I could probably manage to get the return in dollars. For example, I could go over to Shanghai and set up a java software development outsourcing business and I'd get plenty of US dollars while the restricted cash slowly goes into the pockets of Chinese software developers.
UPDATE 8/4/06:
Someone on the Raging Bull message board for ETLT brought up a good point. The Chinese cash can't be used to bail out the US part of the business that will be starting up soon. While this is a good point, I don't think the business will be heavily invested within the US. But if they do need to raise dollars, it could be fairly dilutive if the stock continues to get no respect. I still think the stock is worth a great deal more than the current price.
In my opinion, the reason to discount the cash is not because of the restrictions on currency exchange but because where it's going to end up. The company has stated that the cash will be used to fund a business venture that will return what appears to be only about 5% per year on the investment. The plans of ETLT would be at least as difficult to overcome as the Chinese restrictions, and the result is far worse. However, I still believe ETLT is a good investment at forty something cents. Just add up the expected future earnings.
Give me a million dollars worth of restricted renminbi and I guarantee you that I'd get a reasonable return on it after some work, and I could probably manage to get the return in dollars. For example, I could go over to Shanghai and set up a java software development outsourcing business and I'd get plenty of US dollars while the restricted cash slowly goes into the pockets of Chinese software developers.
UPDATE 8/4/06:
Someone on the Raging Bull message board for ETLT brought up a good point. The Chinese cash can't be used to bail out the US part of the business that will be starting up soon. While this is a good point, I don't think the business will be heavily invested within the US. But if they do need to raise dollars, it could be fairly dilutive if the stock continues to get no respect. I still think the stock is worth a great deal more than the current price.
When in Qaanaaq, stay at the Hotel Qaanaaq
// posted by Bruce @ 6:40 AM 
