Singapore Stock Market News

2Q results

Income statement

1. There is a jump in revenue from 166 mil RMB in 2Q07 to 188 mil RMB in 2Q08, representing a jump of 13.3%. Net profit increased from 26.8 mil RMB to 27.9 mil RMB.

2. Gross profit margin increased from 41.6% to 45.2%. Net profit margins decreased from 16.1% to 14.8% quarter to quarter. I'm currently monitoring net profit margin situation.

3. Selling and distribution/admin expenses(SDA) to revenue (%) increased from 24.5% to 28.0%.

4. Net profit margin drops mostly due to share of losses of JV (580k RMB), finance cost (395k RMB) and a drop in 'other operating income'.

Here's a summary of quarterly ratios:

-------------------------1Q08-------------1Q07--------2Q08----------2Q07
Gross margin--------41.6%-------------39.4%---------45.2%----------41.6%
Net margin----------15.3%-------------16.8%---------14.8%----------16.1%
SDA to revenue------23.1%-------------19.7%---------28.0%----------24.5%


Half year results

No need to talk so much, a table of ratios will do the trick.

-------------------------1H08-------------1H07
Gross margin--------43.3%-------------40.5%
Net margin----------15.1%-------------16.5%
SDA to revenue------25.3%-------------22.0%

As mentioned, I'm a little worried over their net margins. It's to be expected while their new shops are opening and hence net margins continue to fall. As long as it stabilise around 15%, I'll be happy.

1H08 revenue is 412 mil RMB, while 1H07 revenue is 342 mil RMB. For a little perspective, the full FY07 revenue is 739 mil RMB, so the 1H08 revenue is already 56% of last FY's revenue. My full year FY08 revenue of around 890 to 1000 mil RMB is on track. Net earnings of 62 mil RMB for 1H08 also compares well with full year FY07's earnings of 110 mil RMB. Baring unforeseen circumstances, I'm sure Hongguo FY08 results will be better than last financial year.


Balance sheet

-----------------------------1H08------------1H07
Current ratio----------------3.6-------------2.8
Total debt to equity(%)------27.4------------37.1
ROE(%)-----------------------11.7------------11.4%

There's no long term liability. The notes payable to trade creditors are interest-free and secured on fixed deposits, amounting to 16.3 mil RMB in 1H08, compared to 37.8 mil RMB in 1H07. No big changes in balance sheet items for Hongguo. As usual.


Cash flow

Net cash from operating activities for 2Q08 dipped to -12.2 mil RMB, from 14.5 mil RMB 2Q07. Main culprit is the huge amount of notes payable. I think there's nothing alarming about one quarter of negative cash generated from operations, esp when it's used for paying down their notes payable. As mentioned in the balance sheet, the notes payable from their current liabilities dropped by more than 50%. Hongguo is using its cash flow generated from its operations to pay it off.

As for investing activities, there is no disposal of subsidiary for this 2Q, so there is a dip in the net cash from this part of cash flow. Again, nothing important worth mentioning here.


Others

EPS for Hongguo in 1H is $0.1563 RMB. My target for FY08 EPS is $0.32 RMB.

Here's the contribution to revenue and by its different brands

C.Banner --- 62.2%
E.Blan ---- 9.2%
Contract manufacturing --- 17.0%
JUC --- 6.9%
Naturalizer footwear --- 1.7%

Of note is that while all other business, there is an increase in new outlets for 2Q, there is actually a close of 6 retail outlets for Jiangsu Unity Corporation (JUC). This will be something to look out for in their annual report for FY08. Naturalizer footwear also started contributing to their revenue since 1Q08.

Production capacity dedicated to contract manufacturing segment was increased to 6 production lines. The management that they believed this current level of production is adequate in satisfying demand, hence there are no immediate plans to further expand production capacity in short term. This means there are no foreseeable big capex in the near term. Cash flow should further improve.


Value to price comparison

Annualised EPS for FY08 is SGD $0.06252. Last close is SGD $0.33 per share. This represents a PE ratio of 5.3x. This is around historical low PE of Hongguo, which is 5.5x (occurred in 2005 and 2006).

Dividend paid out in FY07 is SGD 1.418 cts per share. At last close of SGD $0.33 per share, it's around 4.3% dividend yield (based on FY07's dividend). Actual amount will vary as it's subjected to the exchange rates of USD because the dividends are actually paid in USD and posted in cheque, instead of the usual direct transfer to bank account. Not that it matters, actually.

Applying Graham's strict (current assets - total liabilties)/shares outstanding, we get SGD $0.192 per share. Using NAV [(total assets - total liabilites)/shares], we get SGD 0.267 per share.

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Hongguo's 1Q08 result analysis is here.

China Hongxing gave a strong 2QFY08 report. Here's the highlights of the reports:

1. Revenue increased 53.1% for the quarter ending 30 June 08. For the 1HFY08, revenue increased by 48.4% compared to 1HFY07. Gross margin dropped from 42% in 1H07 to 40% in 1H08. For the same period, net margins also dropped from 18.8% to 17.4%.

My take:

The revenue growth of Hongxing is always admirable. They are on the fast track to increase their points of sales (POS) rapidly, and this contributes to their top line exponentially. Just for the first half of FY08, they increased their POS by 397 to 3,648 in China. In the whole of FY07, the revenue is RMB 2,046 million. Just for 1H08, the revenue is already RMB 1,333 million. If we annualised the 1HFY08 revenue figure, we're going to see a 30% increase in revenue from FY07 to FY08. Probably more than this, since 4Q is their strongest in sales for the entire year.

There is strong revenue growth in all segments of their business, something to cheer for. Footwear makes up 68.5% of their revenue, while apparel makes up 26.8% in 1H08, compared to 59.4% of revenue in footwear and 33.2% in apparel for 1H07.

For the margins, there is an appreciably drop in both gross margins and net margins quarter to quarter. In FY07, gross margin and net margin are 41.4% and 20.4% respectively, compared to 1H07's 42% and 17.4%. I think this is normal, as the new POS are just starting up and needed some time to bring in the crowd and add in to the top and bottom line. I think one needs to be more mindful of the expenses chalked up in the meantime - Selling and distribution in 1H08 is now at 257 mil RMB, compared to 312 mil RMB for the whole of FY08. If management carries on the pace of their expansion of new POS, their gross and net margins will definitely be squeezed by higher expenses.

I think I would exercise caution in building the brand empire. Too much too soon will breed redundancy, which will cost them dearly if economic situation isn't as rosy as they forecasted.


I found something ironic in the footnotes of the results. It mentioned on pg 9 of 13 that the strong growth in revenue is mainly attributed to:

"(iii) our ability to raise our selling prices; and"

But a few lines down, under the heading of "Cost of goods sold and gross profit margin", it mentioned that the gross profit margin went down because

"This was mainly due to product discounts of approximately RMB 78.0 million provided to our distributors and retailers".

While this is probably nothing worth alarming over, the ironic of the situation struck me. If they are able to raise their selling prices, why offer discounts to sell to distributors and retailers? Their business strategy?


2. Current ratio for 1H08 is 15.6. Quick ratio is 14.8. For the same period, total liabilities to equity is 13.6%. Cash flow from operation went down to - 248 million RMB in 1H08, compared to 90.8 mil RMB in 1H07.

My take:

Hongxing always had very good gearing and low borrowings. In FY07, current, quick and total liabilities to equity are 14.7, 14.2 and 14.4% respectively. I don't think they have much problems of insolvency in the short term, nor in the long run.

For their cash coming from operation, the huge shortfall should be due to the increase in prepayments, deposits and the receivables - to the tune of 592 mil RMB. There is also a corresponding big increase in the inventories held (which they mentioned is for the commencement of their new manufacturing facilities). I believe this is normal for a company that is on the fast track to increase their POS, so they needed to increase their supplies to facilitate the setting up of these new POS. Indeed, they mentioned this on pg 11 of 13.


3. EPS (diluted) increased from 7.57 cts RMB to 8.61 cts RMB in 1H08. For non diluted basic EPS, it increased from 8.44 cts RMB to 9.14 cts RMB for the same period.

My take:

For FY07, EPS (basic) is 16.4 cts RMB. If we annualised 1H08 EPS, we can roughly get around 18 cts RMB, representing around 10% growth in EPS. At current price of 0.485, this represents a FY07 PE of 14.7x. Forward FY08 PE will be around 14x. While it did come down from a PE of 20x just 3 months ago, I think at least at 14-15x PE, it's a more reasonable price to enter. Reasonable but not necessarily giving a wide margin of safety.

Assuming a pessimistic scenario, I think a growth of 10% EPS is what I can accept. So perhaps a PE of 10x, with a price of around 0.34-0.35 seems to offer more margin for a deeper and better sleep at night.

C&G Industrial holdings had a ninja 2QFY08 announcement on 3rd August, yesterday. It is rare to see a company giving its result announcement on Sunday. Caught me off guard, so to speak :) I noticed it when I saw a big drop in % change - around 27% drop - when I checked my watchlist.

Not going to do any detailed analysis. I thought this is a good candidate for pure Graham's play. The big drop is likely due to the bad 2Q08 results. Revenue dropped 7.2% compared to the 2Q07, gross profit dropped 17.4% and net profit dropped 66.5%. What caught my eye is actually the huge administrative expenses chalked up - to the tune of 23.9 million RMB, an increase of 362.4% from 2Q07.


A few factors caused the 2Q08 results to stink:

1. Revenue dropped because sales are affected by snow story in early 2008. But I think the more important fundamental change in their revenue stream is due to the fact that their yarn products are now confined to functional yarn, combed yarn and compact combed yarn. These are products with higher margins and those normal yarn products with lower margins are not longer manufactured or outsourced since Feb 2008. I think this creates a short term drop in revenue, but can potentially bring about greater good in the future.

Selling price were also reduced during 2Q08. This is worth looking closer because if a company had true competitive edge over others, I wouldn't expect selling prices to be cut. Is there a problem with tough competition eroding their selling prices and hence profits?

2. Net margins dropped due to the drop in revenue but no corresponding drop in the cost of sales. From around 19% net margins in 1H07, it dropped to 15% net margins in 1H08 (extraordinary gains are inclusive). 28.8 % gross margin dropped to 27.8% during the same period too.

To me, it's a short term problem. If their plans to manufacture and sell higher margin products succeed, this short term drop in net margins and gross margins will correct itself.

3. Other income - this is due to the exchange rate gains made in 2Q07 to the tune of 4.3 million RMB while there is a exchange rate loss made in 2Q08 around 1 million RMB. Did they do some form of hedging?

4. Administrative expense increases a lot because of an increase in consultancy fee for research and development (14.7 mil RMB). I suppose this is one off and will not recur every quarter. If this 14.7 mil RMB is added to their 1H 08 results, the drop in net profits is only around 8%, and not the 26.6% report in the results.

In other words, this could just be another temporary problem, just like their net margins and possibly revenue drop.


Graham's play?

What is so interesting about C&G is that they are sitting on a huge pile of cash and cash equivalents - 560.873 million RMB. Taking 468,000,000 as the number of shares outstanding, this gives us a cash/cash equivalent per share of 0.234 SGD.

I'm not sure where the cash comes from, but I think it's likely coming from the net proceeds from issue of shares of 218,514 million RMB made in FY07. This amount is just carried over to the current FY.

Let's be really conservative and calculate the total liabilities per share. Total liabilities stand at 228,661 mil RMB, giving us total liabilities per share of 0.098 SGD. Thus, after paying off all liabilities using only their cash/cash equivalents, there is still a cash per share of 0.142 SGD.

Graham recommended using current assets to minus off all liabilities (my calculation is even more conservative since I only used cash/cash equivalents to minus off all liabilities, which is part of current assets). Doing that we have a value of 0.192 SGD per share. Using a margin of safety of 30%, we get around 0.134 SGD per share.

Anyone game to play Graham on this company? :)

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edited: Mike informed me that I had miscalculated some figures because I used the wrong shares outstanding (I used the 07 figures instead of 08). Re-did my calculations :)

CIRCULAR TO SHAREHOLDERS (“CIRCULAR”)

in relation to

THE PROPOSED UPGRADING OF BASIC CBOX TO PREMIUM CBOX (“THE UPGRADE”)

------------------------------

DEFINITIONS

For the purpose of this Circular, the following definitions apply throughout unless the context otherwise requires or unless otherwise stated.

“BullyTheBear” : The once exclusively technically inclined, but now almost exclusively fundamentally inclined financial website in Singapore

“cbox” : The tiny little community space above the blog posts of BullyTheBear and below the header, where shareholders can type in messages and discuss the mundane and important issues of the day

“Chairman” : Chairman of BullyTheBear website, known popularly as La Papillion, or LP

“Exchange rate” : Exchange rate of 1 USD to 1.40 SGD, taken conservatively.

“Mike” : Chairman of Straits Times Index. Despite everyone calling him Mike, Mike is not his real name. Mikedurst is what he is known in cna forum

“Upgrade” : The changing of the free and basic plan of cbox to the paid and feature-ful premium cbox

-----------------------------

To: The shareholders of BullyTheBear


Dear Sir/Madam

THE PROPOSED UPGRADING OF BASIC CBOX TO PREMIUM CBOX (“THE UPGRADE”)


1. INTRODUCTION


1.1 The Upgrade

The Chairman of BullyTheBear would like the shareholders to consider this proposal of upgrading the basic cbox to premium cbox. The cbox had been an integral and important part of the culture of BullyTheBear. Despite several major facelifting and structural changes that had occurred and will occur in the future, the cbox is one feature that will be set in stone. In fact, BullyTheBear will not be where it is today if not for the bond building and sharing that took place among shareholders, many of whom are regular users of the cbox.

As such, on 1st August 2008, the Chairman decided to act on the suggestion by Mike on the Upgrade.


1.2 Purpose of this Circular

The purpose of this Circular is to provide shareholders with relevant information relating to the Upgrade, and to seek shareholder’s approval and feedback for this exercise. Shareholders are requested to give honest feedback, but it is to be noted that the decision of the Upgrade lies solely on the Chairman. That being said, the voices of the shareholders will taken into consideration on the final deliberation of the Upgrade’s decision.


2 Details of the Upgrade


2.1 Listed below are the features that the Upgrade to premium cbox will bring about:

(a) Higher capacity – the premium cbox can store up to 600 messages (as opposed to only 100 messages for basic cbox) with up to 1000 characters long each. Each and every post are also archived.

(b) Users can delete their own last messages in the event of typos. The administrator can also delete messages and ban users with a single click.

(c) Ad-free

(d) Dynamic auto-refresh – yes, the feature everyone is waiting for. The rate of autorefresh is dynamically adjusted to the rate at which new messages are being posted

(e) Sound notification in the event of new messages. This complements the auto-refresh.

(f) A ‘who’s online’ display lists who is viewing and who is chatting

(g) Advanced style editing

(h) Custom word filter

(i) Allows users to password protect their names to prevent impersonation


2.2 Cost of the Upgrade

Cost of the Upgrade depends on the period of time for which the premium cbox is purchased. Generally, the longer the period, the cheaper the cost is. Here are the costs for different periods:

Period(months)----------Cost(USD)------------Cost per month (USD)
------3------------------------$6.00-----------------------$2.00
------6------------------------$11.00----------------------$1.83
------12----------------------$20.00----------------------$1.67
------24----------------------$35.00-----------------------$1.46


3 Evaluation for the Upgrade

In evaluating the Upgrade, the management of BullyTheBear had taken into account the pertinent factors set out below which will be considered as they are deemed to have significant bearing on the assessment.

(a) Rationale of the Upgrade

(b) Financial effects of the Upgrade

(c) Possible effects of the Upgrade


3.1 Rationale of the Upgrade

As a responsible company, BullyTheBear believes in involving shareholders in its major decisions. While sole responsibility and decision eventually rests on the management, the Chairman still believes in seeking honest and prompt feedback. Below are the key reasons for the Upgrade:

(a) As mentioned in the Circular, BullyTheBear is a shareholder friendly company. There are currently some small amounts of cash and cash equivalents held in the advertising revenue of BullyTheBear account as mentioned the 1HFY08 results announcement dated 4th June, 2008. While small, it is not insignificant. The Chairman wishes to reward shareholders for their continued loyalty to the BullyTheBear. Consider this the dividend for supporting (and continuing to support) BullyTheBear’s only source of revenue.

(b) It is the wish of the Chairman to give back to society what it had been given to him. Through the tiny space occupied by the current cbox, a lot of important discussions had been debated and ideas thrown around shareholders. By the Upgrade, it is hoped that such active discussion will continue to be an active feature of BullyTheBear. The Chairman would like to take this opportunity to once again thank all the regulars and not-so-regulars who frequent the cbox daily like the neighborhood’s kopitiam.

(c) Though this is not a serious and prevalent problems yet, the Upgrade will prevent impersonation of regular users of cbox as the premium version allows the user to password protect their nickname. This protects both the integrity and credibility of users – two of the important tenet that is held closely by BullyTheBear’s management.


3.2 Financial effects of the Upgrade

The cost of the Upgrade will be borne solely by BullyTheBear internal cash/cash equivalents, funded entirely by the advertisement revenue generated while serving the shareholders. There are no plans to issue rights shares or rights warrants to fund this Upgrade. Depending on the period of the Upgrade, this exercise will set BullyTheBear’s account by anything from USD 6 to USD 35 or an equivalent of SGD 8.40 to SGD 49.00 based on the Exchange rate.

Donations are welcomed, of course. For those donors who are afraid of conflict of interest between serving the good of BullyTheBear and the self-serving good of fattening the Chairman’s bank account, there is an option of buying the Upgrade as a gift. More details can be found here.


3.3 Possible effects of the Upgrade

Since the premium cbox will have auto-refresh, the Chairman fears that this might slow down the speed of downloading BullyTheBear’s site contents. Since there is a 30-days money back guarantee, if there is ever a noticeable slowdown in the access speed, the Upgrade will be downgraded as soon as possible.

Other than this, other possible effects could be an increased usage by shareholders and possibly new shareholders. Disruptive personnel with wild rantings of “Go and Die” and spamming of websites can also be controlled more effectively, ensuring a more conducive environment for the benefit of shareholders.


4 Conclusions

The Chairman would like shareholders to give honest and prompt feedback on the Upgrade. Shareholders can do so by clicking the comments button at the end of this Circular and they can be sure that the Chairman will address their concerns and feedback within 1 working day. The Chairman would like to recommend:

(a) Upgrade period of 12 months, with an expense of USD 20.00 or SGD 28.00 based on the Exchange rate

(b) request active shareholders to visit the cbox website for more information, though most of the key information had been listed in this Circular.