Beware of Preferred Apartment Communities, China Power IPOs

 |  Includes: APTS, CNPT
by: IPOdesktop

Preferred Apartment Communities (NYSEMKT:APTS) is scheduling a $45 million IPO with a market capitalization of $50 million at a price range of $10 per share for the week of March 21, 2011.

Conclusion: APTS is a newly formed REIT where the primary use of IPO proceeds is to buy two money-losing apartment buildings. Five independent board members expect to receive $275,000 in fees. This doesn’t smell right to me. The trust is trying to sell 90% of the REIT to the public. I think investors should stay away from this IPO.

Initial Agreement: APTS has entered into purchase agreements relating to the acquisition of two properties with third parties affiliated with APTS’s manager.

Are the ‘third parties’ brokers or principals? If they are principals then there is no transparent ‘arms' length transaction’.

Financials not so good: Proformas show (page 63 in the March 10, 2011 S-11 SEC filing) revenue of $6.5mm and loss of $8mm.

Overpaid Board of Directors: $275,000 total. APTS plans to pay to each of its independent directors a retainer of $50,000 per year. Trust will also pay an annual retainer of $10,000 to the chair of the audit committee. In addition, each independent director will be paid a fee of $2,000 for each board committee meeting the director attends in person and reasonable out-of-pocket expenses incurred in connection with attendance of meetings of our board or board committees. That’s a minimum of $55,000 per outside director, or $275,000, which is far too high for a REIT that plans on operating two apartment buildings.

Use of Proceeds: Minimum of $44 million. $22mm for cash down payment, $3.5mm for working capital reserve.

China Power Technology (CNPT) is scheduling a $30 million IPO with a market capitalization of $172 million at the price range mid-point of $13 for Wednesday, March 25, 2011 according to its most recent SEC filing.

Conclusion: There has been a recent downdraft in small Chinese stocks listed in the US, partially due to lack of confidence in reported numbers. As of March 17, CNPT has only filed financials through September 2010 (March 3, 2011 filing), which raises questions about their financial control systems.

At the price range mid-point the P/E multiple is 8, based on annualizing results for the nine months ended September 2010. Look here CNPT valuation metrics.

CNPT’s business is prosaic – industrial boilers – and could be negatively impacted by higher rates of inflation in China.

Business: Manufacturer of circulating fluidized bed, or CFB, industrial boilers in China. CFB boilers represent a clean, energy efficient combustion technology characterized by high thermal efficiency and low pollution emission.

CNPT’s industrial boilers are built to last for 15 years and can be used for longer periods in some cases, so boiler sale customers generally do not to give the company repeat business until they need to upgrade their boilers. Nevertheless, 26% of revenues for the year ended December 31, 2009 were derived from returning customers

Inflation Risk: Future inflation in China may inhibit CNPT’s ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation.

During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.

High inflation may, in the future, cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for CNPT products and the company.

Employees: 1,470 full-time employees as of September 30, 2010.

Use of Proceeds: Net proceeds of approximately $27 million. $18 million to $22 million will be used to expand the manufacturing business through the acquisition of one or more domestic boiler manufacturers. $4 million to $5 million will be used for capital expenditures to upgrade existing equipment or purchase new equipment in order to expand manufacturing capacity. Any remaining balance will be used for working capital, research and development or general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.