Tuesday, March 14, 2006

ROI on Yi-Lai: Part II

2. The review of Balance Sheet.

I would take a good look at the issue of inventory. Click here or open the pdf file 4QFY2005Financial Results

What caught my eye was the inventory.

At end of fy 2005, Yi-Lai's inventory now stood at 33.743 million. While last fiscal year fy 2004, Yi-Lai's inventory total was 22.023.

Question: Is Yi-Lai's inventory build-up a concern?

How?

Let's compile some quarterly inventory numbers. Quarterly Inventory since fy 2004 Q4..

22.023 mil (04 Q4), 25.234 mil (05 Q1), 29.973 mil (05 Q2) , 33.743 (05 Q3), 32.690 mil (05 Q4)

Firstly, why is the inventory issue important? And why is more important in the tile industry?

While I was told that the tiles do not deteriorate over time, however, the design of tiles is important. A good fashionable tile helps boost sales, while poorly designed tiles could get outdated and turn into dead stock. So when a tile manufacturer reports a rising inventory, the concern is that the inventory could consist of out-dated tiles. So when you consider that yi-Lai's inventory increased from 22.023 million a year ago to 32.690 million, how concerned would one be?

The concern is that although the tiles have a long life-span since it does not deteriorate, an out-dated, out-fashioned tile is a dead stock which could not be sold. Is this a non-issue?

On the other-hand, some could argue that since Yi-Lai has its own direct customers, (it is mentioned that 50% of its tile sales goes directly to project developers (one can verify this fact by checking out Yi-Lai's list of projects
here )) pushing out these 'dead stocks' should not be too much of an issue.

How?

The other issue is the cash issue. Open the
4QFY2005Financial Results pdf file again.

A year ago, Yi-Lai was a company in a nett cash position with over 76.230 million in its piggy bank, no debts. The most recent report showed that Yi-Lai still had zero debts but the piggy bank cash has depleted to just 48.198 million. For a company that reported a net profit of over 27 million, would one consider this as a concern?

Well, the company paid over
21 sen per share dividends for its previous fiscal year. And recently Yi-Lai has built a new plant.

And this would account for Yi-Lai's depleting cash issue.

However, that new plant itself is an issue.

Back in Nov 2005, RHB had a report which stated the following:

  • Yi-Lai’s new line that boasts a production capacity of 5,500-6,500 sq m/day is now ready for commercial production but practically left idle due to the weak demand condition. The line may be activated over the next six months. Originally designed to produce multi-effect tiles that yield higher margins, the line may be switched to produce glazed tiles or other tiles that are in demand. Given that we expect the weak demand condition to persist over the longer term, it make sense for Yi-Lai to switch its existing production from some of the smaller, older and less cost effective lines to the new line

Ah.. two issues for me.

1. Although the funding of this capex was done without any bank borrowings, a whole new production left practically idle does not bode well. All dressed-up but no where to go! How? What if the production continues to be left idle? Who is paying for the bills?

2. Back to inventory issue... can't help wondering if this new plant issue had any doing with the inventory issue....

Things worth considering or do you reckon these are simple non-issues?

~~~~~~~~~~~~~~~~~~~~~~

hhc has posted some good comments for all regarding these issues.. I have added his comments into this posting...

Now the question in my head, is value starts to surface in Yilai? COmparing to Wthorse, every concern you had mentioned is a night mare in Wthorse or other tile marker.

MOst of them are in net debt. higher inventoriesWthorse 2005 161.8M 2004 126.8M while revenue for 2005 383.9M 2004 408M. Percentage of Inven to sales

__________2005 2004

Yilai..........27% 16%

Wthorse... 42% 31%

I would said that Yilai inven is a worry but not as bad as in Wthorse problem.One more things to ponder, yilai is mainly producing low value tile which can be used by any developer. So when the property sector recovers, yilai should have no problem in pushing their stock since they are generic and common tiles unlike those homogeneous or designer tile.

2) Factory expansion.I dont blame them on this as at year 2004, everyone is expanding (Wthorse esp). AS a competitor , u cant wait and die so some kind of expansion is desirable to maintain the status quo. Luckily, the expansion is internally funded and Yilai is still debt free. This increase its chance to survive downturn. I think u wont doubt yilai will survive.

How?

If you have any comments and opinions on these issue, please we would like to hear your feedback!

4 comments:

hhc1977 said...

nm,

I agree with your 2 points of concern. I believe market had duly priced in the concerns and yilai price had slided from Rm2 to RM1.2.

Now the question in my head, is value starts to surface in Yilai. COmparing to Wthorse, every concern you had mentioned is a night mare in Wthorse or other tile marker.

MOst of them are in net debt. higher inventories
Wthorse 2005 161.8M 2004 126.8M while revenue for 2005 383.9M 2004 408M. Percentage of Inven to sales

2005 2004
Yilai 27% 16%
Wthorse 42% 31%

I would said that Yilai inven is a worry but not as bad as in Wthorse problem.

One more things to ponder, yilai is mainly producing low value tile which can be used by any developer. So when the property sector recovers, yilai should have no problem in pushing their stock since they are generic and common tiles unlike those homogeneous or designer tile.

2) Factory expansion.
I dont blame them on this as at year 2004, everyone is expanding (Wthorse esp). AS a competitor , u cant wait and die so some kind of expansion is desirable to maintain the status quo. Luckily, the expansion is internally funded and Yilai is still debt free. This increase its chance to survive downturn. I think u wont doubt yilai will survive.

Moola said...

hhc,

Wassup dude?

Good comments... i've added ur comments into the main posting!

Hope we could get more feedbacks!

:D

Cheers!

Anonymous said...

Kim Hin is another tiler that is debt free, in fact Kim Hin has about $0.90 cash per share if you include its short term investment in unit trust.

Moola said...

Hey anon,

I do not believe at all in the cash per share yardstick because the main assumption is that an unlocking of wealth (cash) will happen and when it happens it, the assumption is that the minority shareholder will benefit.

For me, my personal opinion, is that such investing becomes a game of speculation, a game of chance, in which the investor has equal chance of winning and losing.