The Mystery Behind Elec-Tech's Additional Share Issuance

　　"This is a capital-intensive, technology-intensive, and highly cyclical industry—not one that small capital can afford to play in. Look at today's silicon semiconductors, and you can predict tomorrow's LED." These were the bold words spoken by Wang Donglei, Chairman of Elec-Tech, in an exclusive interview with Gaogong LED in 2011.

　　On April 5, 2012, with the assistance of state-owned capital, Elec-Tech once again managed with great difficulty to complete a private placement of 1.561 billion yuan. This came less than a year after the previous targeted issuance of 3.5 billion yuan. In addition, in November 2010, the company successfully completed a targeted share placement of 1.5 billion yuan at a price of 9.54 yuan per share. Within less than two years, Elec-Tech had raised nearly 6.5 billion yuan in capital for LED project expansion.

　　It is worth noting that Elec-Tech's current non-public refinancing issuance has not been plain sailing.

　　First, the issuance experienced insufficient valid subscriptions, forcing the issuer and underwriter to reluctantly increase the offering; then, subscribers reduced their subscription amounts, causing the stock to fall below the minimum issuance requirement, compelling other subscribers to make additional purchases. After going through these setbacks, this private placement refinancing barely succeeded.

　　At this point, the shareholder structure of Dehao Runda also underwent subtle changes.

　　In November 2010, the issuance targets were the controlling shareholder Dehao Investment, Wuhu Economic Development Zone Optoelectronics Industry Investment, Wuhu Longwohu Construction, and Wuhu Yuanda Venture Capital, the latter three of which all have state-owned backgrounds; the "main force" of the company's targeted additional issuance, Bengbu Chengtou, is also a wholly state-owned enterprise. After the completion of this targeted additional issuance, Dehao Investment's shareholding ratio was 21.04%, while the combined shareholding ratio of the four state-owned shareholders reached 22.13%. At this point, the combined shareholding ratio of state-owned capital has surpassed the controlling shareholder.

　　Although three successful additional issuances temporarily solved Dehao Runda's urgent needs, Wang Donglei's days are still not easy, as the company is facing the most difficult moment after its LED transformation. On one side are the huge equipment subsidies from local governments, on the other side are the venture capital institutions with local state-owned backgrounds continuously diluting equity. Dehao Runda seems to be increasingly binding its grand LED empire dream with the interests of local governments.

　　Continuous Crazy Investment

　　It is undeniable that LED is a money-burning industry. The cash flow strain caused by frantic investment seems inevitable.

　　Dehao Runda's 2011 annual financial report shows that the company achieved operating revenue of 3.07 billion yuan, an increase of 18.12% over the previous year. However, it is worth noting that the company's monetary assets dropped from 1.6 billion in 2010 to 860 million in 2011, a decrease of 46.70% from the end of the previous year. The company's current ratio in 2011 was 1.0 times, and the quick ratio was 0.76 times. As of the end of Q1 2012, its short-term borrowings amounted to 1.09 billion yuan, accounting for 16.12% of its total assets, with total liabilities reaching as high as 4.1 billion yuan, and the asset-liability ratio approaching 50%.

　　The current ratio and quick ratio reflect a company's capital liquidity and its ability to repay short-term debt. Generally speaking, when a company has abundant cash, the current ratio is usually above 2 times, and the quick ratio is usually above 1 time.

　　Obviously, Dehao Runda's two indicators mentioned above have fallen below the safety level and show a continuing deteriorating trend. Compared with Sanan Optoelectronics (600703.SZ), Dehao Runda's liquidity is clearly lagging behind. Data shows that Sanan Optoelectronics' 2011 current ratio was 3.28 times and quick ratio was 2.51 times.

　　The financial report shows that Dehao Runda's 2011 operating profit margin was mainly driven by its LED business, and the main reason for the growth of the LED business was the substantial revenue increase during the reporting period from LED application products with higher gross margins, especially LED streetlight products. This also includes the contribution from substantial government subsidies. Data shows that during the reporting period, the company received subsidies totaling 513 million yuan from three local governments in Wuhu, Yangzhou, and Bengbu, of which 437 million yuan has been included in the current profit and loss.

However, Dehao Runda paid an even greater price for this.

According to the financial report, Dehao Runda's fixed assets surged from 600 million yuan in 2010 to 1.22 billion yuan in 2011. Of this, construction in progress amounted to as much as 1.8 billion yuan. As of now, the company's funding gap for projects under construction has reached as high as 2.8 billion yuan, including 2.4 billion yuan for the Wuhu LED industry project, 81.73 million yuan for the Yangzhou LED industry project, and 340 million yuan for the Dalian LED industry project.

According to the financial report, during the reporting period, Wuhu Dehao Runda has received 50 units of MOCVD equipment, Yangzhou Dehao Runda has received 30 units of MOCVD equipment, and another 20 units have yet to be purchased. In addition, according to an insider at Dehao Runda, most of the newly arrived MOCVD machines at the Wuhu LED project are currently being commissioned. Since the commissioning cycle is typically relatively long, and the supporting chip production equipment also requires corresponding commissioning time, coupled with a trial production period of more than half a year, the Wuhu project will not meet the conditions for mass production in the short term.

Continued strain on the capital chain has repeatedly driven Dehao Runda into difficulties.

Reporters found that Dehao Runda had proposed a plan in July of last year to issue corporate bonds with a planned issuance scale not exceeding 900 million yuan, with the proceeds to be used for repaying corporate debt, optimizing the corporate debt structure, and supplementing working capital. However, this plan was rejected on October 26 of last year by the Issuance Examination Committee of the China Securities Regulatory Commission, with the feedback: "The company's LED project currently has weak profitability, and there is uncertainty about whether it can achieve expected returns in the future."

　　For Dehao Runda at that time, private placement had become its only means of financing.

　　On October 13, 2011, Dehao Runda received from the China Securities Regulatory Commission the "Approval for the Non-Public Issuance of Shares by Guangdong Dehao Runda Electric Co., Ltd.", with the approval date for the placement set at October 8, 2011, giving a validity period of six months until April 8, 2012. Therefore, convincing investors to hold a uniformly optimistic view of the company's business prospects before the issuance deadline, so as to make the placement plan more attractive, became Dehao Runda's most pressing task from then on.

　　At this time, the global LED market was suffering from continuously rising upstream inventories and downstream end-lighting market demand falling short of expectations, with stocks piling up, low capacity utilization, some companies even announcing their withdrawal from LED, and more severe cases going straight into bankruptcy. All signs indicated that LED demand in 2011 fell far short of expectations, and the LED industry was overheated in investment and over-hasty in its expansion.

　　A securities professional who had been continuously tracking the LED industry believed that, given unstable factors such as the industry's cyclical position, market trends and valuations, institutional enthusiasm for participating in private placements had become somewhat more rational. Only stocks that trade at a discount can offer greater profit opportunities and attract the pursuit of the secondary market.

　　Using large orders to "paint a rosy picture" for a placement has long been a common tactic employed by listed companies, and this time Dehao Runda played it to the hilt.

　　Since February, Elec-Tech has successively disclosed four agreements with a total value exceeding 1 billion yuan, which undoubtedly played a key role in promoting the subsequent private placement.

　　The series of overseas orders that Elec-Tech intensively disclosed also triggered a strong rebound of its stock price in the secondary market.

　　Since the fourth quarter of last year, Elec-Tech's stock price fluctuated violently, once falling to 14.3 yuan. It was not until March of this year that the company intensively disclosed a series of major agreement contracts and other positive news, and the stock price returned above the issue floor price. Within just two months, the stock price rose by more than 30% in the range. The day after Elec-Tech announced the signing of a procurement agency agreement of no less than US$45 million with U.S. ShiningImage International, the stock price reached a high of 19.64 yuan in the range. #p#Page Title#e#

　　Subsequently, Elec-Tech finally got what it wanted, issuing a total of 100 million shares at a price of 15.61 yuan per share, raising a total of 1.561 billion yuan. The proceeds will once again be used for the Wuhu LED epitaxial wafer production line project.

　　Recently, Wang Donglei, in an interview with "GOLED", still spoke in his typically commanding tone: "Without scale, there is no future. You can only be a passerby in the LED semiconductor industry, not a player!"

　　At the same time, he revealed that Elec-Tech International will continue to expand its LED business this year, with revenue expected to grow by at least 50%, striving to double.