The games that companies play: Tongda

Below is the 10-year stock price chart of Hong Kong-listed Tongda Group Holdings (698 HK). The company produces plastic components for consumer electronics, a hot industry given the explosive growth of smartphones in China in recent years.

Tongda

The red circles in the chart indicate two instances where the company has raised cash through secondary offerings.

Just before the January 2007 equity issue, the stock price went from HK$0.15 to HK$0.60, up 300% within a year.

Just before the March 2014 equity issue, the stock price went from HK$0.50 to HK$1.12, up 124% in just a few months.

Pretty good timing!

Now fast forward to 2015. The stock is up 72% YTD and volumes have started to pick up. How do they respond?

By yet another press release indicating plans to issue HK$880 million in convertible debt at a conversion price of HK$1.88 and an interest rate of 1.0%.

Tongda’s management is either very good at timing the market, or very good at drumming up interest for their stock at exactly the right time.

Exactly who will be buying these convertibles is a mystery. Barriers to entry in the industry are practically zero and competition from the likes of Foxconn is high. Free cash flow conversion rates are poor. And smartphone sales in China have started to contract after a few years of rapid growth.

For this you are paying 2.6x book and 16x earnings. Slower-growing competitor Ju Teng is trading at 0.7x book and 6x earnings.

I get the feeling that Tongda’s management will have the last laugh.

Fritz

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