China Paper - Rights Issue Review

About China Paper Holdings Limited (www.chinapaper.com.sg) 
Located in Shandong province in the PRC, China Paper is a vertically integrated paper manufacturing company equipped with in-house production facilities for the manufacture of wheat pulp, paper products and paper chemical products. The Group’s core business is in the manufacture and distribution of mixed-pulp based paper products made from a mixture of wood pulp and wheat pulp, with printing paper being its largest product segment.

Rights
The  Company is proposing a renounceable non-underwritten rights issue of up to 907,922,418 new ordinary shares in the capital of the Company ("Rights Shares") at an issue price of S$0.036 for each Rights Share "Issue Price"), on the basis of 1 Rights Share for every  1 existing  ordinary  share. The Issue Price of S$0.036 for each Rights Share represents a discount of approximately 42.86% to the closing price of S$0.063 for each Share traded on the SGX-ST on 30 March 2012.

CY Executive Chairman & QYG SS both committed to take up their rights issue representing near 40% of the total outstanding shares of CP. 

Rationale and use of proceeds
The estimated Rights Issue proceeds of approximately S$32.27 million (after deducting costs 
and expenses) will be used to fund the Project.

1) expansion initiatives to attaining an annual paper production capacity of 350,000 to 500,000 tonnes. 
2) for the construction, installation and operation of an inhouse power generation facility for the Company's paper production facilities.

S&C Quick Analysis:
Financial position before rights: net cash of about S$0.05 per share.
After rights: net cash about S$0.044 per share.

2011 net profit fell about 40% as compared to 2010 due to increasing cost and lowering of sale pricing to keep competitiveness. Group is cautiously optimistic about its next 12 months. I believe CP will still remain profitable for YR2012. However, shareholders will not like its call for rights issue. Even before rights, CP is sitting on so much cash. 

1) Why didnt the company consider utilizing internal resources to fund expansion and for building energy facility?
2) Being S-chip and penny stock, shareholders would likely dump the shares and bring it down to near S$0.036 per share. 
3) Given net cash of S$0.044 per share, this may not be the case as most part of S$32 million raise may be use for expansion. Assuming all proceeding to be used up, its net cash position will be around S$0.025 per share. Thats about 70% net cash to share price of S$0.036. 
4) Resignation of independent director whom is the chairman of audit committee will not bode well with the company too. It also happen at the time when CP running fund rising activity. There must be something we are not aware of.

This rights issues may be well a chance for CY to accumulate more of CP shares if shareholders are not buying its expansion story. Being still on net cash position, given that if the cash position is real, there is no reason why CY wouldnt use this chance to buy up all un-taken rights offering. Then take the company private. I used to own CP shares, but offloaded it long ago at S$0.12 - 0.16 range because of limited upside and alot of scandal relating to S-chip. Indeed, many S-chips are now trading at super low price and only a few are able to sustain the sell down. 

S&C will likely to buy only when CP is trading below S$0.036. I understand the risk of buying penny S-chip. But worth a bet when the price is right. Sure buy price will be below S$0.03.