Smartheat (HEAT) -- A lot of things have happened over the last month or so that have totally changed this company. The biggest thing was a huge public equity offering. I've been patiently waiting for the stock to dip back down near the offering price (as often happens in these situations) before writing this up again, but it doesn't look like that's going to happen at this point.
They now have a huge war chest and it will be interesting to see how it ends up getting deployed. Also, just having a bunch of cash in the bank should help in getting more business, since many of their customers are very large companies and large companies usually don't like to do business with smaller companies unless they can be comfortable that the smaller company is going to be around in the future.
Soon after the offering closed, both of the firms in the offering, William Blair & BMO Capital Markets, initiated coverage of the company with great reports, see links to them at the company's website, smartheatinc.com .
The below excerpt from the Blair report sets out what the funds raised will be used for:
"Recent Equity Offering
SmartHeat completed a common stock offering on September 17, 2009, selling 8.333 million shares.
The offering was priced at $9 per share, for an aggregate purchase price of $75 million. Net proceeds
to the company after expenses related to the offering (including consulting and legal fees) were about
$65 million. The company plans to use the proceeds in the following manner:
• $15 million for working capital needs in the core PHE and PHE system businesses
• $8 million to $10 million for expansion of the heat meter business (which may include an
acquisition)
• $6 million to upgrade existing facilities (including likely investment in laser welding equipment
to enable expansion into the welded PHE market)
• $4 million directed at debt repayment (debt associated with Siping acquisition)
• $30 million investment in new product development and associated production start-up over
the medium term
After the offering, senior management owns approximately 45% of the company’s equity on a diluted
basis (approximately 61% before the offering). William Blair & Company, L.L.C. and BMO Capital
Markets acted as placement agents in the offering. SmartHeat (HEAT) shares trade on the NASDAQ."
So about $40 M of the funds ($1.25/share) don't really have anything to do with next year's earnings but rather will be used to strategically grow the company. Thus, I believe a reasonable approach to valuing the company now would be to back that amount off of the share price and then see what the PE multiple on next year's earnings is. That works out to a multiple of just 14, higher than previously but still well below the company's recent and expected future growth rate.
So far Smartheat has made 2 acquisitions, each of which were priced well below the stock's current PE multiple. Their first one, last year, was at about 8x earnings, and the second one, in June, was at only 5 x earnings. There seems to be a significant disconnect in China between valuations of private companies in this space vs. the valuation of this publicly traded company on the US markets.
Fidelity agrees with me that this is a great investment and last week they filed a Schedule 13D indicating that they recently bought up about 4 M shares or about 12% of the company. This is likely to spur other institutions to get on board. |
