Sound Global

[mrEngineer]

Ok my fault with poor choice of words. I should not use "call" but "redeem" or "redemption" instead as it is confusing with typical callable bonds.

[l0nEr]

I had gone thru few bond issues, due to my holdings. None of them are base on interest coverage etc.

Let bring back the discussion to our context. I had highlight call on demand for bank debt (at the first sign of trouble), rather than at bank free will. So we are aligned.

Actually, in the recent bond issue, there is a covenant "Limitation on Indebtnedness and Preferred Stock". The details will probably be out when the offering circular is online on the sgx website.

Meanwhile, I'll point you to a recent bond issue by Ezion Holdings (you can find the prospectus in SGX...
http://info.sgx.com/listprosp.nsf/b7f097...a0024e899/$FILE/1371679_v(1)_Ezion%20IM_090512_Clean_v16_Low%20(Final%20IM%20dated%209%20May%202012).PDF
On page 11, there is a summary of the financial covenants.
(i) the Consolidated Tangible Net Worth will not at any time be less than U.S.$ 250,000,000 ;
(ii) the ratio of Consolidated Total Borrowings to Consolidated Tangible Net Worth shall not at any time be more than 2:1 ;
(iii) the ratio of Consolidated Secured Debt to the Consolidated Total Assets of the Issuer shall not at any time be more than 0.6:1 ; and
(iv) the ratio of EBITDA to Interest Expense shall not at any time be less than 3.5:1 .

Typically, these covenants are more commonly found in High Yield issuers.

Yepp, based on IFRS, once a loan/bond breaches a covenant that can result in it being recalled/redemned, it will automatically be classified as short-term loan, with a note to account. As such, i was thinking that if the loan is redemable on demand, it would have been classified as short-term debt on the balance sheet.

[l0nEr]

In contrast to the loan/debt issue, actually I'm more curious about what you like about the company.

I'm interest in it too because of the water treatment industry. Seems like droughts and floods are going to be a big problem, with world wide food shortage (seems like a well-known story already).
However, it seems like the industry is a bit fragmented and seems quite hard for non-SOE companies to win large projects. I see competition from large SOEs such as Beijing waters enterprise. I also read somewhere that their projects have a payback period 8-10 years, although order books seemed to have strengthened, how do you value a company like this? Also, it seems like their ROC for the past two years have been aroud 12-13%, while ROA is about 8%, why pay 12% for a debt deal?

[CityFarmer]

Actually, in the recent bond issue, there is a covenant "Limitation on Indebtnedness and Preferred Stock". The details will probably be out when the offering circular is online on the sgx website.

Meanwhile, I'll point you to a recent bond issue by Ezion Holdings (you can find the prospectus in SGX...
http://info.sgx.com/listprosp.nsf/b7f097...a0024e899/$FILE/1371679_v(1)_Ezion%20IM_090512_Clean_v16_Low%20(Final%20IM%20dated%209%20May%202012).PDF
On page 11, there is a summary of the financial covenants.
(i) the Consolidated Tangible Net Worth will not at any time be less than U.S.$ 250,000,000 ;
(ii) the ratio of Consolidated Total Borrowings to Consolidated Tangible Net Worth shall not at any time be more than 2:1 ;
(iii) the ratio of Consolidated Secured Debt to the Consolidated Total Assets of the Issuer shall not at any time be more than 0.6:1 ; and
(iv) the ratio of EBITDA to Interest Expense shall not at any time be less than 3.5:1 .

...

Before our discussion go nowhere, i would like to recap it to our initial context, funded debt is riskier than bank debt, due to it is more likely bank debt been called than funded debt under similar financial crisis. Funded debt is unlikely been called, if interests or coupon been paid promptly.

To put us under the same context, there is a flaw in your posting, the flaw of fragmented info causing misleaded conclusion. If i refer to the document of Ezion Holdings bond's document page 40, which stated the detail of the Financial Covenants. The financial covenants will become effective if coupons is outstanding i.e. not pay promptly

The Issuer has further covenanted with the Trustee in the Trust Deed that so long as any of the Notes or the relative Coupons remain outstanding, it will ensure that:
(i) the Consolidated Tangible Net Worth will not at any time be less than
U.S.$250,000,000;
...

[CityFarmer]

In contrast to the loan/debt issue, actually I'm more curious about what you like about the company.

I'm interest in it too because of the water treatment industry. Seems like droughts and floods are going to be a big problem, with world wide food shortage (seems like a well-known story already).
However, it seems like the industry is a bit fragmented and seems quite hard for non-SOE companies to win large projects. I see competition from large SOEs such as Beijing waters enterprise. I also read somewhere that their projects have a payback period 8-10 years, although order books seemed to have strengthened, how do you value a company like this? Also, it seems like their ROC for the past two years have been aroud 12-13%, while ROA is about 8%, why pay 12% for a debt deal?

Base on the description, you have already spend effort to understand the market and industrial practice of WWT (Waste-Water Treatment)

There are few reasons to start with before i touch on valuation

- The prospect of the WWT market in China alone
- The relative low valuation of the company vs its competitors

China continues to face severe water pollution and water scarcity problems. It is expected that total wastewater will continue growing due to rapid urbanization and industrialization, reaching 79 billion tons by 2015. The current wastewater treatment infrastructure is still inadequate and there will be continued construction of new facilities and upgrading of existing ones, resulting in a large demand for investment.

The 11th Five-Year Plan (2006-2010) emphasizes the concepts of constructing a water-saving society and treating water pollution and this trend is expected to continue into the 12th Five-Year Plan (2011-2015). China has also stipulated relevant policies to encourage private and foreign investment in wastewater treatment facilities.

According to China latest Five-Year Plan, RMB ~350 billion is earmarked for environmental protection projects, including municipal water and wastewater treatment projects.

SoundGlobal's biz is waste-water treatment and its market is mainly in China. That make it a great opportunity for SoundGlobal

Next is the relative low valuation vs its competitors. Who are the competitors? To named a few, China Everbright in HK, Hyflux, MemstarT, United Envirotech in Singapore.

The PE of MemStarT and United Envirotech are above 15, while Hyflux is more than 30. China Everbright in HK is also above 15, while the company is less than 10. Further into financial detail, SoundGlobal did better than most of them.

This is just a summary of the reasons to invest. We can discuss further detail in later postings.

[l0nEr]

Before our discussion go nowhere, i would like to recap it to our initial context, funded debt is riskier than bank debt, due to it is more likely bank debt been called than funded debt under similar financial crisis. Funded debt is unlikely been called, if interests or coupon been paid promptly.

To put us under the same context, there is a flaw in your posting, the flaw of fragmented info causing misleaded conclusion. If i refer to the document of Ezion Holdings bond's document page 40, which stated the detail of the Financial Covenants. The financial covenants will become effective if coupons is outstanding i.e. not pay promptly

The Issuer has further covenanted with the Trustee in the Trust Deed that so long as any of the Notes or the relative Coupons remain outstanding, it will ensure that:
(i) the Consolidated Tangible Net Worth will not at any time be less than
U.S.$250,000,000;
...

Agreed, i think we misunderstood each other on the funded debt/bank debt issue.

Oh no, i think you misinterpreted page 40 of the Ezion. it means that if the notes are still valid and out in the market (when its not defaulted). Its like when you say a company has XXX of outstanding shares. So they mean the notes are still outstanding. If the company has defaulted, there will be no need to assess financial covenants coz its already in default! (means EBITDA will definitely fail to cover interest)


Ah, i must admit i didnt do much research on the WWT industry. I was just looking for some WWT companies after hearing the story of WWT in China (as you have described), before noticing this company. At that time, I thought the company had ROE that is better-than-peers and lower PE too, but stock kept falling so i forgot about it until now. I attributed the lower PE was due to the S-chip status in Singapore, and its smaller scale.
Im just more curious about the long payback. One report from Poems said about 10 years, another said about 8-10 years. Is this the norm for the industry? including other players like Hyflux? Coz the long payback means the company will need a lot of cash and long-term debt for liquidity, while being in negative FCF in the near term. It will probably lower the IRR of the projects too. Besides, the company still derives most of its revenue from building projects (instead of recurring income). While more projects, means more debt. That said, i certainly like that the company has the backing of IFC, a renowned investor.

[CityFarmer]

Ah, i must admit i didnt do much research on the WWT industry. I was just looking for some WWT companies after hearing the story of WWT in China (as you have described), before noticing this company. At that time, I thought the company had ROE that is better-than-peers and lower PE too, but stock kept falling so i forgot about it until now. I attributed the lower PE was due to the S-chip status in Singapore, and its smaller scale.
Im just more curious about the long payback. One report from Poems said about 10 years, another said about 8-10 years. Is this the norm for the industry? including other players like Hyflux? Coz the long payback means the company will need a lot of cash and long-term debt for liquidity, while being in negative FCF in the near term. It will probably lower the IRR of the projects too. Besides, the company still derives most of its revenue from building projects (instead of recurring income). While more projects, means more debt. That said, i certainly like that the company has the backing of IFC, a renowned investor.

First of all, SoundGlobal should be taken as H-Chip, instead of S-Chip, since it is listed in HK Exchange

The BOT project typically splits into 2 phases, construction phase and operation phase. Construction phase takes 1-3 years depend on size. Operation phase last till the full concession period. During construction phase, typically no payment received (depend on contract). The incurred cost will be recovered in operation phase, which typically take 8 years to break-even.

Beside BOT projects, there is another EPC projects which contribute significantly to the company. EPC projects' pay-back period is much shorter than BOT projects.

Yes, i agreed that it is capital-intensive biz. But it is a good biz with overall gross margin of more than 30%. Moreover concession receivable are charged with interest

The pay-back starts once in operation phase. SoundGlobal started its BOT biz around 2007, and more projects are already in operation phase. Base on 2011 AR, nine (9) projects are in operation phase. I anticipated more will move to operation phases after 2012, since bulk of projects are secured in year 2009/2010.

The share price keep falling in the last 1-2 years may due to the CB. Mr Market seem not in favor of the CB, which i concur. I am still doing my research on the rationality of redeem CB with the senior notes issued. Once done, i will share it

[CityFarmer]

Sound Global announced their FY2012 Interim result

http://info.sgx.com/webcorannc.nsf/Annou...endocument

The Group’s revenue increased by approximately RMB123.7 million or 11.7% from approximately RMB1,060.3 million for the six months ended 30 June 2011 to approximately RMB1,184.0 million for the six months ended 30 June 2012.

Gross profit increased by approximately RMB21.5 million or 6.5% from approximately RMB329.6 million for the six months ended 30 June 2011 to approximately RMB351.1 million for the six months ended 30 June 2012

Profit attributable to owners Company increased by approximately RMB18.1 millions or 10.3% from approx. RMB175.4 million for the six months ended 30 June 2011 to RMB193.5 million for the six months ended 30 June 2012

The company continue to grow its revenue, gross profit and net profit. Gross profit margin reduces slightly to 29.7% from 31.1%, which is reasonable due to the nature of the project.

[CityFarmer]

Here is my view on the company priced a US$150m five-year non-call three to yield 12%, to re-finance the CB and other WC needs.

First of all, is the note too expansive?

Sound Global is rated Ba3/BB– by Moody’s, which make it a junk-rate company to debut in the US dollar market. That make it a high-yield bond. Furthermore with the failure of ZhengTong Auto, Baoxin Auto and China Tianrui Group to raise funds recently, the company definitely had to put up more carrots to attract investors.

It is a fair price to raise fund for the company now

Next is it rational to re-finance the CB with the note?

The equity part of the CB is becoming more expensive. The conversion price of the CB is adjusted down each time the company paid dividend, and upon conditions listed in the CB. Since the issue of CB on 2010 with conversion price of $0.924, the conversion price had adjusted down several time to $0.674 recently.

IMO, the CB had served as obstacle for the company to reward shareholders without paying a high price.

It may be a rational to re-finance the CB, before shareholders value been diluted excessively

[CityFarmer]

The company chairman WEN YIBO has done open market purchase today

967,000 share @ $0.565

That bring him direct holding of 2,874,000 shares (0.2228 %), and deemed holding of 713,289,000 share (55.2937 %)

That indicating $0.565 probably is a under-valued.