China Security & Surveillance: Whitehorse Deal a Bullish Sign

On China Security & Surveillance (CSR), I just wanted to give a brief impression of the recent transaction involving Whitehorse Technology Ltd., a company owned by its CEO. In the transaction, Whitehorse sold Exchangeable Senior Notes due 2012 to an unnamed third party investor (not affiliated with CSR) for $50 million. The Notes are backed by a pledge of 8,750,000 shares of CSR owned by Whitehorse.

In total, Whitehorse and the CEO, Tu Guo Shen own about 13,800,000 shares of CSR stock, or about 32.8% of the current fully diluted outstanding shares of 42,381,000.

The proceeds from the sale can only be used to purchase additional shares of CSR, lend as a note to CSR or to complete acquisitions for CSR. In essence, the CEO is leveraging his existing shares to purchase more shares or finance an acquisition for the Company.

Overall, I am interpreting this move as a bullish move by the Company's CEO. My only potential concern with this transaction is if he is already leveraged a portion of his stock and he was doing this to shore up the stock to prevent margin calls. However, it seems fairly unlikely that he would be able to obtain such a large not if he was in a difficult margin situation.

Additionally, from the Yahoo Finance insider transaction data, Mr. Shen has only acquired stock in the past year and has not sold any stock.

I think this is another strong signal of the future potential for CSR.

Further, I fall back on the Citadel transaction. If you will recall Citadel has invested $110 million in CSR in Convertible Notes with a 1% annual interest rate with $60 million convertible at $18 per share and $50 million at $23 per share. If Citadel decides not to convert its shares then they are redeemed at face plus a 15% rate of return for the hold period. This is a bullish structured financing. I feel very good about having a buy in price at lower levels than Citadel's conversion price.

If my position were not already 12% of my portfolio, I would be adding to the position, but I cannot prudently buy more at this time.

Disclosure: Long CSR

Comments

[J.D]

Security and surveillance in the PRC? Reckless.

[User 142738]

It's a fairly well-known fact that the Chinese government has its hands in every bit of economic wealth, but betting on a company called "China Security & Surveillance"? Please.

If you want to make money on keeping the Chinese citizens downtrodden, just buy Cisco and Google stock.

[INVN]

If it sounds too good to me true . . . it might be. Given the recent drop in stock price, the loan is approaching a potential default just weeks after issuance.

The 13D filed on January 30 indicates the risk being taken with this loan. In particular, exhibit 2. This shows what may be a troubling issue regarding the loan. The value of Mr. Tu's collateral must be 300% or more of the $50m loan. Thus, given the 8.75m shares he owns at current prices being worth $121, he must post an additional $29m of collateral. While this is based on a ~20 day average price, it suggests that were the stock price to stay below $17.10, he'd have to post more collateral and below $13.42, he wouldn't have enough stock to avoid default on the loan. This is a real stretch, but should the loan be defaulted on, the lender would get all of the stock, and given the collateral would still be worth close to 300% of the loan, the lender would very likely sell the stock immediately and still book a gain regardless of how much damage it caused the stock.