Excellent spot there tippy re. the TFC logo on the store window!
Some thoughts:
1. The value given for the Sandalwood clearly indicates Indian Sandalwood. So it's likely TFC's China customer.
2. This would blow a hole in the contracted supply agreement.
3. I would presume that TFC would have sold the wood FOB so that as soon as it was loaded in Perth it is no longer theirs (consistent with recieving $US cash up front)....their legal implications are therefore probably minimal
4. Not quite sure what to make of the TFC logo....the footage looks like a bunch of potential customers entering as I would have expected customs officials to all be dressed in uniform.
5. But at least we know QIN has a presence in China and that they actually have sold wood and it is real
5. This could lead to a downgrade of FY17 guidance given sales will be interrupted
6. It highlights massive demand for Indian Sandalwood in China...the 200m yuan of sandalwood seized = $A38m
7. Um, this is a kind of weird point but cancelled sales now could boost TFC's earnings in FY18 as the company still has the wood to sell.
So what appears to be a likely scenario of the China customer contract being cancelled is pretty clearly a negative for TFC in the short term. Mgt may have others lined up to buy existing inventories but who knows how quickly this could occur. So come Monday we could see FY17 guidance downgraded.
In the longer-term this actually validates what mgt have been saying regards China demand....if it's valuable enough to smuggle within China and these smugglers are willing to pay $US120/kg (I think that's right??) for the wood (with $US cash up front!) then I'm confident QIN will find adequate buyers as harvests begin to ramp up.
Are there any other risks? Well, a possible perception that mgt signed up to a contract with a smuggling ring will not help. Any financial risks...i.e. ability of noteholders to call notes?....I don't believe this is likely as any downgrade would be for 3 cancelled shipments which is a maximum of $US6.75m revenue, so not a massive impact to earnings.
So....if I was a trader I would be looking to short come Monday. As an investor....compared to other hurricanes TFC has weathered such as the MIS sector implosion, the GFC, banks pulling loans, will the trees have oil, etc, etc in my opinion this looks modest if one can afford to look out a few years.
Interestingly the timestamp on the CCTV site indicated the news came out before market open yesterday. We saw the massive gap down and fall to $0.97c in the morning followed by a recovery to $1.10 by close, so if I was a trader I would be a little careful that the trading robots haven't already absorbed this and done their work.
Anyhow, again great work tippy! One negative I do have about HC is that it can be a bit 'rah-rah' as investors fall in love with stocks. I greatly appreciate more cautious perspectives and items such as the Glaucus note that make me re-test my investment thesis and open me to risk factors I may not have already considered.
