Outlook6 Nov 2015 16:39
This share is a real nail biter. This is why it is interesting (in my opinion).
We all know about the terrible cash flow. And we all know about the danger of AIM stocks. And so the market has drawn a conclusion which is:high profits but terrible cash flow plus Chinese equals fraud.
The question is this. Could there be an exception to this rule?
In my view, there could well be an exception. If a genuine company were supplying large builders, who themselves carry illiquid stock (houses), they would have no choice but to accept the terms of the builders. The builders will conserve cash as long as possible and refuse to pay suppliers until they are selling their stock. The companies that supply them would have very little choice but to comply. It is similar to Tescos driving their suppliers out of business with low prices and extended payment terms.
To me, this adds up to no fraud. The company is however distressed. But being distressed doesn't necessarily mean the share price should be obliterated; though it would definitely fall hard.
So my conclusion is this. Firstly, there isn't fraud here. I therefore believe TW is wrong. I also believe there is no reason for the NOMAD to resign. We know that they have sufficient cash for another year or so from the placing so there is no reason for any imminent danger of collapse. That means it is a waiting game. We are waiting for their customers to sell houses and pay their bills. Every time the PBC lowers interest rates, things should gradually improve. I think there is year's margin of safety. If the housing market recovers, so will Auhua. If it doesn't recover in 12-18 months, then Auhua will need another placing or it will be history.
A year is a long time in the stock market! I think the odds are pretty good that it will all turn out fine. I have spent a lot of time considering this and I wanted to be in a neutral (no shares) position to consider it as I know how biased our views can become once we are 'in'. I will be re-investing in the future when I think the time is right.