Sinotop Holdings Bhd’s rights entitlements (Sinotop-OR) closed at its historic low of 0.5 sen on its last trading day yesterday, ending a dismal performance following a sudden surge in the mother share just before the OR was listed.
Sinotop-OR fell one sen or 67% at the end of trading, with nearly 40 million units changing hands.
Sinotop’s mother share price had surged on June 28, the day before the OR started trading, raising more than eyebrows, as the company was queried by Bursa Malaysia Securities on the unusual market activity.
In its reply, Sinotop said after making due enquiry with its directors and major shareholders, except for information that had been announced in respect of its ongoing corporate exercises, it was not aware of any development that might have contributed to the unusual market activity.
The mother share price traded at a 12-month high of RM1.68 on June 23, the day before the rights adjustment.
Sinotop’s share price was adjusted to 33 sen after it was traded ex-rights on June 24 and closing 16.5 sen higher at 49.5 sen on that particular day.
On June 28, the day before the OR started trading, the mother share had surged to close at 60.5 sen, up 83% from the rights adjusted price of 33 sen.
The following day, the share price rose another 7% to a high of 65 sen. The stock then held up for a couple of days, before plunging 19.5 sen or 30% to 44.5 sen on July 1 and has been on a steady decline since then, falling to a low of 26 sen last Friday, down 60% from the post ex-rights high.
Yesterday, the stock fell another 1.5 sen to close at 27.5 sen, with over 5.7 million shares done.
On the OR’s first trading day itself, the price fell 70% or 28.5 sen to 12 sen from its reference price of 40.5 sen. On that day, the OR was traded between 11.5 sen and 28.5 sen, with over 92 million units changing hands, representing about 30% of the total rights entitlements in issue.
Sinotop’s proposed renounceable rights issue involves up to 307.08 million new shares of 20 sen each at 20 sen per rights share on the basis of 10 rights shares for every one existing share held.
This means that for every 1,000 shares held, a shareholder has to come up with RM2,000 to subscribe for 10,000 rights shares. Depending on the subscription rate, the company aims to raise between RM27 million and RM61.4 million from the cash call.
Shareholders not wanting to take up the rights issue would have brought in a handsome upfront gross proceeds of 28.5 sen per rights share entitlement or RM2,850 for every 1,000 mother shares held based on the intra-day high price, which more than offsets the dilution effect.
It is safe to say shareholders had earlier benefited from the sudden surge in the mother share price just prior to the listing of the rights entitlement.
However, those who had bought the OR practically anytime when it was traded would have lost money, given the precipitous decline in Sinotop’s share price.
An analyst said since the reference price of the OR was derived from the difference between the mother share’s last traded rights-adjusted price and the rights issue price, there was a big opportunity for those who had wanted to renounce the rights issue.
However, the analyst said these were the sort of price movements that investors, particularly the retail individuals, and the regulators must be wary of and guard against. He added that companies had a moral responsibility, if not a legal one, to immediately issue a public statement forewarning investors of any unusual trading activity without any material development, and not wait for Bursa Securities’ query.
The analyst said a consolation for those who had bought into the entitlement to the rights shares at yesterday’s close of 0.5 sen was that the mother share was still traded at a significant premium of 37.5% to the rights issue price of 20 sen.
However, the analyst said ultimately investors needed to assess the company’s fundamentals and fair value, and the sustainability of the mother share’s underlying stock price performance, rather than just focusing on any arbitrage opportunity.
Sinotop is the “new-look” John Master Industries Bhd (JMI).
Chinese textile manufacturer Be Top Group Ltd and its subsidiary, Top Textile (Suzhou) Co Ltd, are injected into Sinotop for RM393.2 million. Sinotop’s old assets, which were under JMI, were disposed of via an open tender exercise that was completed in July last year.
Following that, shareholders of JMI received 63 sen for each share. The company undertook a capital reduction exercise followed by a capital consolidation exercise whereby four shares were merged into one.
The injection of the Chinese textile companies into Sinotop came with a profit guarantee of not less than 100 million yuan (RM47.9 million) for the financial year ended Dec 31, 2009 (FY09) and a profit guarantee of not less than 125 million yuan in FY10.
This translates to prospective price-earnings multiple of about four times based on Sinotop’s enlarged share capital that could be as large as 1.1 billion shares of 20 sen each. On July 1, Sinotop said Bursa Securities had granted it a conditional waiver from being categorised as an affected listed issuer under PN17.
This article appeared in The Edge Financial Daily, July 13, 2010.
Why the price plunged to 16 sen as of 13th Aug 2010? Must be a good level to buy since the rights issued was at 20 sen with PE 4!
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