Friday, October 10, 2008

Ferrochina - Bankruptcy ( Do you still trust Analyst Calls?)

10 October 2008 - Sell $0.545

15 August 2008-Buy $1.28
28 April 2008- Buy $1.56
19 March 2008- Buy $1.16
3 March 2008- Buy $1.41

Ferrochina on the brink of being bankrupt! Even after numerous buy calls! SGDividends got to admit we bought into them in Jan-February 2008 @$1.19.

Reason being: its low P/B ratio of less than 1, Acquisition of Superb Team, Capacity upgrading and Delong ( same industry segment) was being acquired!

What were we thinking really?Herd Mentality?
We sold all our holdings in March@ $1.34. Made some profit and scrammed. So why did we sell? We relooked at the financials and found something which we felt uncomfortable with. They were operating on razor thin margins! Add to that, steel prices and coke which were the raw material input used for their galvanized steel were on the uptrend during that time.
They were also issuing US$55,ooo,ooo notes to refinance a loan during March 2008 and look at the interest payable by Ferrochina. A staggering 13.5% per annum! Thats more than a car loan!
Thats not all. They were also issuing warrants which will potentially be convertible to common shares, thereby diluting existing shareholder's holdings.

Based on the above factors, we decided to unload our stocks as we had this sinking feeling about it.

Investing Lesson: Look at profit margins. A healthy level would be 30% - 20% gross margins. At least there is room to manourvre when demand falls or supply prices increase. Look at ridiculous terms for loans/debts and use common sense! 13.5% is way too much!

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