Thing is...
are "investors" in this because of
1) excellent valuations because of net cash per share?
2) increasing profits?
3) based on perceived prospects based on what management says or based on the confidence that "the management knows what they are doing"
4) SHK as the party of the loan/bond
5) or any other reasons?
For the first 4 reasons,
1) if it is so bloody obvious net cash per share far exceeds share price, why is there such a big discrepancy even though the STI is doing pretty well? This discrepancy has existed for quite a fair bit of time.
I don't believe anyone here has the answer definitely.
So what if cash per share has been increasing? Maybe the market is really stupid?
Then again, what makes "investors" think they are smarter than the majority of the market?
Fact is, by mere statistics, traders and investors will on average achieve gains similar to STI's growth, assuming no brokerage costs.
2) Increasing profits could come at the cost of investors.
2 key points
i) How much of the profits go into the growing receivables?
ii) Discrepancy between ROE and ROA. Like I pointed out, the difference between ROE and ROA may be able to speak volumes. Eratat's ROA is pretty low because the majority of its assets (about half of it) is in trade receivables. These are cash that are not with the company, and are not able to be put to work.
With the issued bonds, shareholders' equity doesn't change, but total assets will increase. Assuming Eratat earns more than the 16% interest they pay based on principal (their net margin is 22%), over the next 2 years, their ROE will look even better. Profits will look even better. But ROA will reduce. Assuming Eratat redeems is something so subjective I don't want to consider it. The bond period is a mere two years, and to even consider redeeming it before that??? What a waste of time and money....!
A good read is here
www.investopedia.com/articles/basics/05/052005.asp
Bear in mind that Eratat carries not a high amount of debt, but a high amount of receivables, explaining the low ROA.
It is not impossible for Eratat to overcome all odds and emerge as a strong company. But considering the quantum needed (using the CFO's words), I highly doubt it will be achievable within 3 years.
3) This is something super subjective, and has been the main counter argument against all the red flags raised so far. Which is why I never reply on such.
All I can say is, if I am meeting investors for my company, I will paint the most beautiful and rosy picture for the company. No one in the right mind will approach investors with a doomsday scenario.
4) If anything, the major risks of issued bonds are not borne by SHK, but by private equity firms and sophisticated investors who may not even know how to study bonds. SHK stands to profit from the commissions.
Remember the mini-bonds saga. The banks effectively transfer risks to retail consumers. And their reputation is still mainly intact after all the things they have done.
Last but not least, share price. Sure, one can wait long term for the eventual appreciation (if it does come), but how long terms does one really have? Anyone investing for the "long term" back in 2009~2010 in Eratat would still not seen much gains, compared to many other much better and easier to understand counters. A person putting $$ into STI would have made between 50% to 100% capital gain already. The time value of money cannot be underestimated.
I do hope investors who fervently believe in this company have done their own due diligence and risk analysis.
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