Telestone Tumbles After Pricing Stock Offer

NEW YORK ( TheStreet) -- Shares of Telestone Technologies ( TSTC) were sitting atop the Nasdaq's percentage decliners list on Wednesday after the China-based networking equipment provider gave a steep discount in its latest capital raise.

The company announced before the opening bell that it priced an offering of 1.675 million common shares at $12 each, a level that 15% below Tuesday's closing price of $14.13. Telestone expects to complete the sale on Nov. 30. Net proceeds are estimated at $18.9 million, not including an overallotment option allowing for the potential sale of an additional 251,250 common shares, if exercised.

The stock was down 14.9% to $12.02 in recent trades. Volume of just below 3 million was more than 13 times the issue's trailing three-month daily average of around 220,000. It's been a volatile year for Telestone. Overall, the stock is down nearly 29% year-to-date, but even at current levels, it's bounced 65% since scraping a 52-week low of $7.29 on July 7.

And while the discount to the current price is significant, the shares did close at $12.02 as recently as Nov. 12. The stock soared more than 20% in the next session, however, to close at $14.80, its first finish above $14 since Aug. 10. The catalyst was a strong third-quarter report for Telestone, which said profits grew almost 200% year-over-year in the September period and that it's confident it will meet its 2010 outlook for net income of $22.9 million, or $2.17 a share, on revenue of $129.4 million.

"Our performance in the third quarter showed a marked acceleration in our business and is consistent with our growth expectations for the year," said Han Daqing, Telestone's chairman and CEO in a statement at the time. "Investments in sales and marketing earlier this year helped ensure our WFDS wireless fiber distribution systems were chosen as the last mile network of choice at targeted installation sites and we have seen a dramatic pickup in our installations year long."

Like many China-based companies, Telestone doesn't have a wide following on Wall Street. The only firm covering the stock is Roth Capital Partners, which is the sole bookrunner on this latest offering, which is being made under a shelf registration statement declared effective back in March.

One indication of skepticism among institutional investors about where the stock goes from here is the heavy short interest in the name. As of Oct. 29, 1.2 million shares, or 16.3% of the issue's 6.8 million share public float, were held short, according to Yahoo Finance.

But if the company can keep up the momentum it showed in the third quarter, when it secured 364 contracts, including its first in the United States, and pushed gross margins up to 45.3%, beating its own guidance of 42%, it may be able to recoup the ground lost on Wednesday and then some.

Telestone said it plans to use the proceeds of the offering for construction of a manufacturing and R&D facility, as well as the usual general corporate purposes. It also mentioned the possibility of using a "portion" of the proceeds for an acquisition, but stressed it has no current plans to do so or specific targets in mind.

-- Written by Michael Baron in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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