Beware of interested party transaction

C&G used to be a stock market darling from 2006 to 2007. But this should no longer be the case going forward with their latest announcement.

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_C00AF58E46FDF7164825759A0030BE44/$file/CG_Memo_of_Understanding_for_the_Proposed_Acquisition.pdf?openelement

Basically, C&G is signalling to its investors that there is not much light at the end of the tunnel for the textile industry. To me, textile is a commodity and there is no pricing power for companies in this industry. Of course, this does not mean that C&G will report a loss in the next few quarters but growing profits will become increasingly difficult as we move on. This is the main reason why i did not buy into C&G after looking through its report in 2006. Yes i missed out on the wonderful gains as the share price went up throughout 2007. But again, a uptrending share price tells you nothing on the business and industry outlook, which one ultimately has to take into consideration when buying shares.

The next thing investors should take note of is the interested party transaction involved for this latest acquisition. Mr. Lam Chik Tsan who is the Executive Chairman and Director of C&G, owns 60% of the issued and paid up share capital of Vendor. Accordingly, the Vendor would be deemed as an “associate” of Mr. Lam Chik Tsan and an “interested person” in the context of the Proposed Acquisition. It should also be noted that Mr. Cai Junyi who is the Company’s Executive Director and Chief Executive Officer, owns approximately 17.5% of the issued and paid-up share capital of the Vendor. The 2 of them in total owns 77.5% of the vendor.

Waste to energy may be the next big thing that the China government is trying hard to promote and rollout. From the environmental viewpoint, this is a positive move forward. But being constantly in the news does not gurantee profits, which is the main driver of share price. Also, one should question how did the independent valuers arrive at the RMB359 million figure. Till now there is only 1 operating waste incineration power plant in Jinjiang. The Target Group has also commenced preparations to construct waste incineration power plants in Huangshi and Hui’an and construction of these plants are expected to be completed by September 2010 and March 2010 respectively. In addition, memorandums of understanding have been signed with the relevant administrative authorities of the Anxi County in the Fujian province of PRC and Chonburi, Thailand. Sounds good. However, one should be aware that memorandums of understanding can be cancelled on short notice.

All this talk of a new promising waste to energy business venture caused me to recall a similar company listed in SGX. The name is China Enersave. Investors will do well to read up on the not-so-great developments thus far.