In the "Alice in Wonderland" world of Chinese reverse merger stocks, one of the many curious phenomena is the dilutive capital raise with no clear need for the money. China Integrated Energy (CHEH) is the latest example, announcing two separate equity capital raises December 29th and January 4th, along with a new $6M loan. Both equity deals were registered direct offerings with relatively punitive 50% warrant coverage, representing significant potential future dilution. Pricing was near the low end of the stock’s trading range over the last year and less than less than 5x forward earnings. Net proceeds from these financings total approximately $43.5M including the debt and after placement fees but before any warrant exercise.
The weird thing is, according to CBEH’s financial statements it doesn’t need the cash and shouldn’t have to raise it on such onerous terms. The company reported $79.7M in cash and $35.6M in operating cash flow in the first nine months of 2010 in its latest 10-Q. CBEH has announced several projects requiring capital expenditures, but should easily be able to fund these from existing cash and cash flow as detailed in the table below.
Obviously the table above is subject to some assumptions, such as the construction cost of the new 100,000 ton capacity plant at Hainan Lin Gao (I estimated as twice the cost of the 50,000 ton capacity expansion plant at their existing biodiesel facility) and that operating cash flow should approximately match net income for the next five quarters (which according to CBEH’s financials it has over the last three quarters). Still, unless there are major as yet unannounced projects, CBEH could theoretically fund its announced projects more than two and a half times over and has no need for the recent $43.5M in new capital.
Of course, red flags abound with respect to CBEH’s biodiesel business. I would also be remiss if I didn’t point out that the company seems to be earning very little interest income on all that supposed balance sheet cash. The company has carried an average cash balance of approximately $71M this year, and seems to have only reported about $40K in interest income. Note that CBEH does not separately break out interest income, I reached that estimate by subtracting the $139K in net interest expense on the income statement in CBEH’s September 2010 10-Q from the $179K in cash interest paid according to the cash flow statement. If there is any other interest income in CBEH’s financial statements, I cannot find it. Interest income of $40K over nine months on an average cash balance of $71M works out to about 8 bps of annualized interest, or 0.08%. While we obviously live in a low, low, low rate world, 8 bps does not make any sense. Especially since according to the very same 10-Q $76.7M of the $79.7M in cash is held in PRC banks, which based on publicly announced and government-mandated interest rates posted by ICBC should pay at least 1.35% on 7 day deposits and 2.25% deposits left for three months or more. Even very basic cash management should be earning CBEH over 100 bps.
Things with CBEH just keep getting curiouser and curiouser.
Disclosure: I am short CBEH.