Hi Jinraidx,
Thanks for your opinions, you bring up some relevant points that are worth thinking about.
Being a relatively small growth-oriented company with a market cap of barely 100 million, Eratat has not really established itself as a stable stalwart in the Singaporean market - it's no SIA, Hyflux or any of the 3 big banks which can confidently issue corporate bonds and expect a good response. This is a situation that is not unique to Eratat but characteristic of small cap companies in general.
Smaller cap growth companies are in a earlier stage of the business cycle and tend to come under the 'higher risk higher returns' volatile category of stocks which are not suitable for issuing corporate bonds. I mean if you're gonna subscribe to bonds for relatively higher risk companies you probably might as well buy the stock right? If you think it can successfully pay you the 8-10% annual interest returns on the corporate bonds consistently for a few years then as a growth stock it's profits are probably growing at much faster than 8-10% a year and you would prefer to invest in the stock. On the other hand if you're risk averse, you'll invest in an SIA bonds or DBS NCPS for the stable returns from stable established companies. For this reason, issuing debts in the form of corporate bonds is not really viable for smaller companies - how often do you see companies with market caps under 100 million issuing bonds right?
Regarding rights issues, Considering that the chairman owns 30% of the company, a rights issue would require him to come up with a significant amount of cash. His shares are worth about 30 million, so if say a one for five rights issue were to be done, the CEO would have to personally raise cash of about 6 million dollars SGD in order to subscribe to the shares, very difficult to do. Besides, correct me if I'm wrong I also don't remember the last time a company with market cap under 100 million doing a rights issue, unless the chairman doesn't own a significant portion of the shares, which is usually not the case.
As for getting a bank loan in the PRC, this is what their Singaporean CFO Ken Ho said in a recent conference:
Mr Ho: We have considered that. Offshore loans – that depends on the structure and therestrictions placed on usage outside of Singapore. Taking a bank loan in China in the towns andprovinces – if we apply for a loan, it’s not just collaterals the bankers are interested in but also apersonal guarantee from the business owner and a guarantee from an unrelated party. It iscommon practice, as some of you know.Yes, we can obtain that but one day, the unrelated party will want a guarantee from you – and thisplaces our company at risk.In addition, the cost of a loan is not that cheap – about 10-12% per annum.And they can give you, say, a 3-year loan but they require you to repay everything at the end of theyear before it’s renewed. What happens if the central bank has a tightening policy and we cannotget a renewal? We have considered all these factors, which is why we are doing what we are doing.And we now have a business expansion plan which we believe we can control and will take us toanother level in the market. When a strategic partner like CMIA comes along and it can add value toour management and the market’s perception of our stock – can we wait until our valuation goes to7X before we consider any fund raising option?
A full copy of this can be found here:
www.eratatgroup.com/v2/files/releases/20110301_nextinsights.pdf
Thanks for your insights jinraidx and I think that as is the case wiith most stocks in the world each company will always have its own fair share of bulls and bears - after all that is how the market attains its current equilibirum. Rarely do the bulls and bears switch sides and there are so many facets to investment analysis that the debates can go on forever and get very tiring - that is why I wish to avoid that sort of thing and so I'll try to avoid continuing the debate from this point. Appreciate you taking the time to read my thoughts above, and good luck with your own investments. Let's just let the stock prices do the talking in the long run