Sinotel Technologies

[Musicwhiz]

The telco holds all the bargaining chips. China Mobile has been known to take 300 days to pay bills. Companies like Sinotel will collapse if they grow too fast, because their working capital needs keep expanding. If they cannot get the financing they are done for.

The accounting P&L says they have a lot of revenue and earnings. The economic reality is that they do not generate any cash and are unlikely to do so for the foreseeable future. The more sales and earnings they have, the more cash they will consume.

Since the company's business model makes it impossible to pay a dividend, an investor has to count on being able to sell his shares to a greater fool willing to pay more.

I am starting to learn and realize that in most cases, it is the nature of the industry and company which prevents it from being a worthwhile investment. In Sinotel's case, the problem of rising receivables and constant cash drain is part of the industry, and so one cannot "divorce" them both. If the business model is capital intensive, then there is likely no free cash flow present, and significant sums of money need to be employed just to keep up with the competition, or to just stay relevant!

So despite the company's pronouncement of contract wins or tie-ups, it's still very important to inspect the numbers closely. I've learnt, over the years, to avoid the glossy hype which generally accompanies press releases, and to instead just focus on what's important.