One a market darling, a stock at the tip of everybody's tongues, Sinotel Technology has seen its fortunes plummeted. More recently, on 30 August 2010, the telecommunications services provider announced a 1-for-4 rights issue, aimed at raising $26.4m net.
In its filing with the Singapore Stock Exchange, the company said that the proceeds would be used to fund the expansion of business in the provision of telecommunication services as well as increase in business activities in the provision of services relating to base station monitoring and diagnostics services to Telcos.
In my opinion, from an investor's perspective, the frequency at which Sinotel has tapped the markets is disturbing. Prior to this rights issue, the company had placed 28m new shares. The Chinese market is one of the world's largest market for such mobile services. However, The business is very difficult and bargaining power does not lie in the hands of small providers like Sinotel, but the major telco operators such as Unicom.
Though not visible from the graph above, Sinotel has had a terrific run up. Despite the financial crisis, its stock price managed to rise and rise, with its peak around October 2009. It could be attributed to that fact that the 3G roll out by the Chinese government to stave of an economic slowdown in the country. Furthermore, the company had been on a protracted PR campaign, selling its growth story and ADRs.
However, its time has come to past. The recent most cash call probably signals the lack of sustainability of Sinotels expansion plan. The graph above shows that after the initial euphoria of China's stimulus measure had died down, Sinotel has made a swift but interrupted descent. My fundamental view is that the industry is too competitive for such a smallish company to survive through organic growth. This cash call - at least the reasons provided- is a demonstration of that the economics of the industry trump its press release. I will do a review 3 months down the road on this call. Maybe I am wrong.