China 3C Announces Private Placement Sale - Sending Shares Down 10%

My timing could not have been worse on China 3C Group (CHCG.OB). A few days after I recommended purchasing shares of the company, it announced a private placement sale of $11.74M at $5.60/share. The issuing of new equity by itself didn’t bother me much, as China 3C Group is a small, fast-growing company looking to quickly build out its network of stores. What put me off was the price of the offering: before word of the private placement spread, shares were trading north of $8. They promptly dropped 10% following the announcement.

According to CEO Zhenggang Wang, I’m supposed to be happy about the price they received. Said Wang:

Although the sale price of the shares was at a discount to the current trading price of the company’s common stock, we believe that management’s ability to act swiftly to negotiate this transaction without the assistance and associated fees of a placement agent demonstrates the company’s desire to maximize the benefits of the capital investment in light of a discounted sale price.

A fast-growing company with bright prospects, and it needs to give a 30% discount for someone to buy 4% of its shares? This stinks to me, and I just can’t own the company after a move like this. The company does have a potentially bright future, and I will keep an eye on it to see if management decides to become a little more shareholder friendly, but for now I will move to the sidelines.

CHCG 1-yr chart

Disclosure: SmartGuyAB no longer owns shares of CHCG.OB