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Saturday, May 17, 2008

Shengda Tech (SDTH) big financing deal

Shengda Tech (combined links) announced a gargantuan amount of convertible senior notes. To put this into perspective, they're raising $100 million while their latest balance sheet shows TOTAL assets of $115 million. I don't recall any word about this in the past from the company. Doubling the size of a company's assets is a pretty big decision to make.

I have two problems with this decision. 1) It's too easy to hide bad things this way. When a company is floating on its own, being driven by its own cash flow engine, it's easy to see what's happening. But when you suddenly dump a massive amount of cash onto the balance sheet, it suddenly gets hard to detect what's going on. 2) It's just bad business to grow a company that fast.
ShengdaTech currently expects to use approximately $56 million of the net proceeds from the offering of the notes to expand its NPCC production capacity. ShengdaTech plans to use the remaining proceeds for potential coal-based chemical acquisitions, strategic investments and to fund working capital requirements.
The acquisitions are a bad idea. If I wanted to invest in Chinese coal-based chemical companies, I would buy them myself.


I dumped the small amount of stock I owned after thinking about it for a while. My new mode of operation in not being too trigger happy paid off as the stock climbed while I thought about it. I ended up with a small gain.

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