On January 26, 2011 Lihua International announced a share buyback program, and then on May 10, 2011 when the the company announced its quarterly earnings the company claimed “As of March 31, 2011, the Company had purchased 97,600 shares at an average price of $9.49 through open market transactions”. Hence this transaction had theoretically returned $926,224 to shareholders.
However, the firm’s cash flow statement showed a curious line item of proceeds from the issuance of warrants, which generated $1,898,050 for the company. Hence net cash provided by financing was actually positive for the quarter of $971,800. Therefore diluted shares outstanding actually grew by 272,297 (30,313,996 [Q1 2011] -30,041,669[Q4 2010]).
Although the impact of share buybacks being lessened by issuance of options to compensate senior executives is not uncommon, in Lihua’s case the issuance of options seems quite excessive. Especially in a climate where most Chinese RTOs are dodging fraud allegations, and Lihua itself has not fully addressed some of the concerns raised by Steven Chapski(https://seekingalpha.com/article/242255-lihua-financial-reports-raise-questions) and Chimin Sang (https://seekingalpha.com/instablog/482-chimin-sang/32150-is-lihua-international-cooking-its-books-part-i).
On May 24, 2011 during its analyst day presentation the company announced that Magnify Wealth Enterprises, a company controlled by company CEO Zhu Jianhua purchased $4 million worth of stock, it will be interesting to see what the share issuances are this coming quarter. Especially since the $15 million buyback scheme has been authorized for one year only, and the pace of it seems slow at best.
I am Short LIWA.
Disclosure: I am short LIWA.