China Medical trades below 50; Suntech Power slips; Cheniere steady; THQ cuts guidance

By Rebecca Melvin

New York, Dec. 7 - China Medical Technologies Inc. didn't bounce back on Wednesday like the underlying shares after the Beijing-based medical device maker responded publicly to allegations of investor fraud and mismanagement by an online research firm Tuesday.

China Medical shares rebounded 72 cents, or 28%, to $3.29, after dropping to as low as $2.46 on Tuesday. The company's 4% convertibles remained unchanged at 48.5 bid, 50 offered, which was down from 60 on Monday.

Suntech Power Holdings Co. Ltd., a China solar play, was down a couple points to 44 despite a 6% rise in the underlying shares.

Elsewhere, Cheniere Energy Inc.'s convertibles were essentially unchanged amid a 4% drop in the underlying shares of the Houston-based liquefied natural gas company.

And other energy names were in trade including Chesapeake Energy Corp. and Alpha Natural Resources Inc.

Goldman Sachs lowered its view of the coal sector to "neutral" from "attractive" and downgraded Peabody Energy Corp. to "neutral" from "buy."

But traders said overall action was quiet.

"[It was] lighter than yesterday. The top two [highest volume names] are only $10 million each," a New York-based trader said shortly after midsession. He was referring to the dollar amount of bonds that changed hands.

After the market close, THQ Inc., which dropped nearly 9 points on Monday to about 78, cut its guidance for its current fiscal third quarter, saying it now sees revenue coming in 25% below the previous forecast of $510 million to $550 million on weaker sales of its uDraw tablet and software.

China Medical doesn't budge

China Medical's 4% convertibles due 2013 traded in the range of 48.5 bid, 50 offered, compared to 60 two days ago, and compared to the upper 80s last June.

The China Medical 6.25% convertibles due 2016 weren't heard in trade but closed at 30, a market source said.

"They don't trade that much," a source said of the 6.25% convertibles.

China Medical's 3.5% convertibles matured last month.

The American Depositary Shares of the Chinese company, which trade on the Nasdaq, closed up 72 cents, or 28%, at $3.29. Yesterday the shares were down 27% at one point but closed higher at $2.57. On Monday the shares closed at $3.38.

The stock's gyrations were attributable to allegations of fraud and mismanagement that the company systematically refuted in a press release on Wednesday.

"It's like another Muddy Waters thing," a Connecticut-based analyst said, referring to a similar situation surrounding Sino-Forest Corp. and its convertibles last June. In that case, it was a research outfit called Muddy Waters that alleged fraud.

In this case, research firm Glaucus Research Group published a report that alleged that China Medical's chief executive orchestrated an overpriced acquisition to embezzle funds.

The research firm disclosed that it held a short position in China Medical.

China Medical, which is an in-vitro diagnostic company, said Glaucus' allegation that it overpaid for the 2007 acquisition of Beijing Bio-Ekon Biotechnology Ltd. for $28.8 million to embezzle funds was entirely untrue.

Specifically, it said that valuations in 2007 were different than at the present time and that it didn't overpay for the company that has subsequently helped China Medical grow.

It said the accusations illustrate Glaucus' lack of commercial knowledge, and that the picture it painted was based on cherry-picked information that didn't tell the whole story.

As for the allegation that China Medical's auditor KPMG resigned after it accused senior management of committing fraud with respect to the company's financials and acquisitions, China Medical posited that PwC wouldn't have taken up its case if the findings indicated problems within the company or its management.

Suntech Power down

Suntech Power's 3% convertibles due 2013 traded around 44, which was down a couple of points from previous markets, a trader said.

But the U.S. shares of the solar energy company, based in Wuxi, China, gained 15 cents, or 6%, to $2.75.

CRT Capital Group LLC analyst David Epstein published research Wednesday on solar convertible names. In the research, Epstein said that Suntech Power has the highest debt in relation to its market and book value, compared with other convertible solar plays, including Sunpower Corp., Energy Conversion Devices Inc., JinkoSolar Holding Co. Ltd., JA Solar Holdings Co. Ltd., aHanwha SolarOne Co. Ltd., Renesola Ltd. and Trina Solar Ltd.

Suntech Power also has one of the largest non-debt commitments, which were about $14.4 billion as of Dec. 31, 2010, the analyst said.

Suntech Power also hopes to reduce working capital by $200 million by the end of the year, largely by slowing down production and reducing inventory.

"We feel the fact that these companies have most of their sales overseas and, to a lesser degree, have overseas assets may marginally enhance creditors' rights vis-a-vis creditors of distressed Chinese companies that operate only in China. That said, we do not necessarily have the view that recoveries would be at all good for any of the Chinese solar manufacturers that may fail," Epstein wrote on behalf of his firm CRT Capital Group.

Cheniere steady

Cheniere's 2.25% convertibles due August 2012 traded at 91.125, which was little changed from previous levels, according to Finra's trace data.

Cheniere shares were down 39 cents, or 4%, at $9.29 on Wednesday.

While a speculative play, the Cheniere 2.25% convertibles have less than nine months to maturity.

Last month the company announced that Gas Natural Fenosa of Spain and Latin America agreed to purchase 3.5 million tonnes a year of bi-directional capacity.

CRT's Epstein wrote in a note at that time that the deal represented a significant achievement for Cheniere that makes it likely the 2.25% convertibles are money good.

Fenosa's capacity purchase was an amount similar to that of BG Group recently. "But BG paid $2.25/mcfe and Fenosa is paying $2.37/mcfe," Epstein wrote.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Cheniere Energy Inc. NYSE: LNG

Chesapeake Energy Corp. NYSE: CHK

China Medical Technologies Inc. NYSE: CMED

Peabody Energy Corp. NYSE: BTU

Suntech Power Holdings Co. Ltd. NYSE: STP

THQ Inc. Nasdaq: THQI

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