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SINOTEL: Lively Q&A with investors
Written by Leong Chan Teik
Monday, 22 June 2009
Sinotel CFO Lo Fui Chu answering questions at the SIAS Research event held at Jolly Frog Cafe on Neil Road. Photo by Leong Chan Teik
SINOTEL TECHNOLOGIES seems to be attracting buying by funds. In its recent announcement, Sinotel said Barron Partners LP of the US bought 6 million shares from a Sinotel executive director.
Prior to that, Barron already owned 3.6 million shares.
Subsequently, another Sinotel executive director - the CEO, Jason Li - sold 7 million shares, which can be interpreted as a worrying sign.
But Sinotel’s vice-president of corporate communications and investor relations, Ben Ng, told NextInsight that there is strong demand from institutional investors and the buyers were reputable funds.
If indeed funds are keen on Sinotel shares, the reason has to do with the company’s potential growth as China’s 3-G network is rolled out this year.Billions of dollars will be spent and Sinotel, which provides wireless network solutions, stands to benefit.
“Our growth prospects in the next two years should be promising,” said Ben during a meeting with SIAS Research members on Friday night (June 19).
During his presentation, he gave figures that showed Sinotel has revenue growth and profit margins that more or less track a peer, Comba, which is listed in Hong Kong and is a far bigger company.
Both also have to live with the harsh fact that it takes a long time to collect payment from their clients. (See table on the right)
Comba is listed in HK. Source of table: Sinotel
Notably, when it comes to net profit margin, Sinotel’s was way ahead at 29.7% compared to Comba’s 9.2%.
Explaining the difference, Ben said Sinotel outsources the manufacturing of its self-designed systems, and employs contract staff to perform its wireless integration work. It maintains mostly fulltime project managers to supervise ongoing projects.
Comba, in comparison, has more employees and its own manufacturing facilities. Comba, because of its size, wins bigger contracts while Sinotel can negotiate smaller jobs with healthier profit margins. Comba also has a wider presence in China, and thus incurs higher office overheads.
Participants of the seminar, which had a lively Q&A session. Photo by Leong Chan Teik
The following are some of the questions that SIAS Research members asked and the answers provided by Sinotel’s Ben and Lo Fui Chu, the CFO:
Q Who are actually your clients: the building owners or the telcos?
Ben: For our core business, wireless infrastructure projects, our direct customers are the telcos. Currently, they are China Unicom and China Mobile. We are paid by them. For outdoor solutions, the work is tendered direct from the telcos. For indoor work, the decision on who to award the job lies with the building owners. But payment comes from the telcos and the contract is signed with them.
Q How do you win contracts from the telcos? Is it through open bidding?
A For outdoor contracts, we go through a tender process. You need to be a pre-certified vendor before you can submit a bid. That’s one of the barriers to entry to this business.
For indoor work, the telcos tell us and our competitors that, say, this row of 10 buildings needs to have wireless coverage. We will then talk to the building owners, who then decide who they want to give the work to.
L-R: Roger Tan of SIAS Research, and Ben Ng of Sinotel. Photo by Leong Chan Teik
Up till now, the interesting thing is we haven’t been really competing with other players as business is abundant. This year, we have started to be selective about the work we want to do, and take on work that is easier to perform, faster to complete and has a higher profit margin.
Q Looking at your financial statements, you have less and less cash. The business is expanding – are you going to raise funds to have more working capital or borrow more and more money, which is not very good, right?
Fui Chu: If the company secures more projects and needs more working capital, our preference is to borrow from the bank. Currently, our gearing ratio is about 12% - it’s still healthy. The lowest cost of financing is still from bank loans because, looking at our stock price, the PE ratio remains low, and it would not be cost effective to raise money from the equities market. Moreover, if we were to issue placement shares, that would dilute all existing shareholders.
Equipment installed outdoors by Sinotel for wireless infrastructure.
Q Your working capital is actually financed by the banks – that’s worrying. Nowadays, you can see cases of banks refusing to roll over loans, and companies fall into trouble.
Ben: Our borrowing in comparison to the company's revenue is relatively low. In abolute terms, we are talking about RMB 30-60 m, which represents only about 10% of the company’s full-year revenue last year, which was RMB 362 m.
That’s why we stress that we are not highly geared. Moreover, our loans are used for working capital needs only and these are to fund contracts which we have already secured. Some of the companies that have gotten into trouble had borrowings that were much higher relative to their revenue and earnings.
Q Will you give dividends?
Ben: As I have explained, this year is poised to be one of the milestone years for Sinotel. We are likely to experience growth and we want to make use of every dollar to expand the business, so that every shareholder can benefit eventually.
Roger Tan (Vice-President, SIAS Research): I’m not helping Sinotel but the decison of the business falls into three parts – investment, financing, and dividends. First thing to decide on, is whether what they are investing in - is it giving sufficient returns? If they are getting sufficient returns, they will get financing for the business. What should they finance with: equity or debt?
Beijing Railway Station is one of several landmark buildings which Sinotel has done projects on.
What they are saying is, if my PE ratio is only 3 – in other words, if i take one over 3 is 30 over per cent – if I go to the market and issue shares or do a rights issue at that kind of PE ratio, I'm taking from the market at a cost of 33%. But if I borrow from the bank, it’s, say, only 5%, and I’d be saving a lot of money. Next they go out and make money and the last part is the dividend decision – should I give my profits back to shareholders, who then will have a reinvestment issue? Or I don't declare dividends, because I'm pretty sure my business will do well if I reinvest in it.
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