SkyPeople Fruit Juice (SPU.NASDAQ) on Wednesday announced a secondary offering through which it hopes to raise US$26.5 million for facility upgrades. The company said it would sell nearly 5.2 million shares at US$5 each, with Rodman & Renshaw – the sole underwriter – granted another 777,193 shares for possible over-allotment.
SkyPeople has earmarked the US$24 million in net proceeds for improvements to facilities at its Huludao Wonder and Qiyiwangguo subsidiaries. After the news was announced, the company’s share price slumped by more than 18%, closing at US$4.79.
As of June 30, SkyPeople had a cash position of around US$ 27 million, well short of the projected US$62 million required for capital expenditure this year. It is clear company needs money, but its decision to raise funds via the equity markets rather than leverage its debt structure is a puzzle.
Most companies would opt for debt financing, which is generally cheaper, but SkyPeople does appear to have an aversion to debt. Based on the company’s most recent financial report, most of its debt is in short-term bank loans and notes rather than long-term products that command lower interest payments. This approach has left investors jittery.
Another cause for concern is the unusually active trading of SkyPeople stock in the last few days. Daily turnover is typically less than 1 million shares, but since August 23 this volumes have more than doubled while the stock price has fallen from US$6.38 to US$4.76.
Given that SkyPeople has just released impressive second-quarter results – net profit was US$5.1 million, up 174% year-on-year – it is odd that the stock should come under selling pressure. This naturally raises suspicions that news of the secondary offering was leaked, triggering a bout of profitable short selling by insiders.
The offering is scheduled for August 30 and SinoSage believes SkyPeople’s stock will slip below US$4.00 with a price-to-book ratio of 1.02 – very low for a company that has such great growth potential. Investors might want to capitalize on this overreaction and wait until belief in SkyPeople’s solid business model restores some sense to the market.