Friday, November 19, 2010

Regarding Xingquan's Cash And Dividends

From the posting: Quick Review On Xingquan's Earnings

  • mosea said...
    The bad thing is that they have yet to be able to deliver dividend which is a dampener.



  • snowball said...

    First, the receivables is up almost twice as much than the sales, which is worrying if it becomes a trend.

    Second, their tax exemption on a major entity, addnice sports which produces 80% of its revenue will ends on 1 Jan 2011, so, on the 2HFY2011, Xinquan need to make 10% (80%*12.5%) just to make up the lose ground.

    Third, they have some advances from directors, which I am not sure whether it is needed since they have so much cash which prompt me to look at their cash and interest income. They earn an annualize interest rate of just 0.33% [(498*4)/((587000+631000)/2)], which is suspiciously lower than that of the current interest rate of China banks-0.36%. Here's the interest rate from ICBC :http://bit.ly/9hF5xN . I have check my computation a few times as it is really too low. It means that they are keeping a lot of money in their office to earn such a low rate. But, if so much of their money is in their office, do they need any advances from director? So, I can't resolve this inconsistencies. But, the advance from director is very low- RMB172k only. However, the interest they earn is surprisingly low, which is a bit worrying. If the money is kept as strategic cash hoard, I think, as a successful businessman like Xinquan owners are, they should be logical enough to put into higher yielding account. But, the current rate is even lower than that of the lowest savings account rate.

Snowball: Great point about the tax exemption and yes, I would fully agree with you that this could be a massive burden. And again, one might have to consider the 15% dilution (sorry mistake!) 12% impact caused by the TDR.

And the cash and dividend issue, which goes back to my first posting: Regarding Xingquan

Let me reproduce the following part..........


Some thoughts regarding its 'cash richness'.

Xingquan raised some 159.682 million from its IPO listing. From its last reported earnings in May 2010.

From the above table, apparently there's plenty of cash raised from the IPO still hasn't been utilised and then Xingquan had stated in the press about its capex plans.

And as per the latest earnings pdf file ( page 11 ), Xingquan reported that currently it had used only 111.058 million. So there's 'plenty of money' not used YET.

Yet, Xingquan had insisted it wants to do the TDR to raise another 76 million.

And naturally the 'confusing' part is that as per current earnings, Xingquan has some 291 million cash (and some 29 million in borrowings).

Ok, snowball has stated before that..

  • Small and medium Chinese company in general like to hoard a significant amount of cash. This is my general observation of S-chips, Red Chips etc. The cash hoard is for strategic reason because of the limited access to credit facilities in China.So, in Xinquan case, the management may want to keep some of the cash for strategic reason either to react to competitor actions or to face possible uncertain regulatory environment. That's why we are seeing chinese companies listed abroad raising doing so many rights issues despite being on net cash.

But the cash as stated by snowball are earning peanuts.

And then the lack of dividends mentioned by mosea.

And if one takes the company's plans into consideration as stated at the end of the posting Regarding Xingquan , then wouldn't it not suggest that the company's main focus is to expand, expand and expand.

Of course a company's plans to expand is not bad but then as a shareholder, one has to wonder 'apa macam ni'? Dividends mana? Somemore got future dilutiions in earnings caused by the TDR. Well, it's certainly not really attractive, yes?

And also, I have no idea in regards to the apparel footware industry in China but I would still question why such an industry requires such massive capital? Shoes woh. Needs millions and millions meh?

(The TDR progam had stated “The proceeds will be used for the expansion of sales and distribution network (RM44.55mil), point-of-sales makeover as part of the rebranding exercise (RM26.51mil) )

21 comments:

ronnie said...

Warren Buffett's Berkshire Hathaway has never paid a dividend for the past 30 years. Are the shareholders planning to get rid of Warren ? The pertinent question is, can we trust the CEO / major shareholder Mr Wu ? If the answer is in the negative, one should either not buy or sell Xingquan.

Moolah said...

poor unker boofy. everything good and bad is compared is against him.
But what to do? He so much wants to be in the spotlight nowadays too. :P

snowball said...

Hi Moolah,

I am not just concern about the fact that their cash is earnings peanuts. If I am a shareholders of Xinquan (which I am not), I would be worried about the extremely low rates that they earn. It is lower than the lowest rate possible.

If the cash is for strategic purposes, it should logically be put into higher yielding accounts. But, currently, the money is just yielding 0.33%, which is lower than the lowest rate out there. Unless they really keep the cash in a milo tin, it may signals some hanky panky. So, if I were a shareholders or analysts, I would probably be concern and ask Xinquan why the cash is yielding so little money.

Based on the different types of corporate acccounts being offered by ICBC, Xinquan can easily doubled its yield if it put part of its money into a type of fixed deposit known as "1-day deposit at call", which they can withdraw the money only after informing the bank one day in advance. The benefits of this account is that, you receive almost 2.5times the normal interest. If I were a manager of Xinquan, I don't see any reason why part of the money is not park at these type of accounts.

Instead, Xinquan cash are yielding below the lowest interest rate which is a cause for concern for possible hanky panky.

Moolah said...

snowball: But ..... me can't be making such statements... so... :P

ch said...

Dear All,

Yes, the issues brought up by Moolah, Mosea and Snowball are primary concern(s) if one is invested into Xingquan. The dynamics of Chinese stocks and business community are always tinged with mysterious circumstances. Be that as it may, the Chinese are rapidly becoming the world economic superpower. One thing I know about Xingquan is that a shrewd investor by the name of Koon Yew Yin is a minor majority shareholder. Please refer to Bursa Malaysia under change in shareholdings column. This is the same man who has years of experience in stock investing and the same person who pledged to donate RM30 million to UTAR (but was turned down by MCA for reason(s) best known to them. He is a smart share investor and invested a sizeable amount in Xingquan. Guess he should know something about Xingquan that we don't.

Moolah said...

Well is stock investing a game of follow me, follow you?

Ok, let's use Unker Boofy. The past recent years, was it a true 100% sure win strategy to follow exactly all his stock purchases?

ps you said: The dynamics of Chinese stocks and business community are always tinged with mysterious circumstances.

Well how wise is it to invest based on mysterious circumstances? Isn't one investing on issues that they have no idea at all? Does this sound logical investing?

I do not know but just some food for thought.

ch said...

Dear Moolah,

You have hit the right note i.e. we should not follow the herd mentality but then again, this news which was fished out from the Bursa website goes to show that a multi-millionaire has invested into Xingquan. He is rich for his smartness in stock-investing or other reason(s) but one thing placed right in front of us is that he has sizeable amount of money in Xingquan. As I have said earlier, is it that he knows something about Xingquan which we don't? I am not saying that your observations and of those of Mosea and Snowball's on Xingquan were wrong nor neither I am trying to convince others to buy Xingquan but the emergence of Mr. Koon as a major minority shareholder is something we should try to understand. Surely, he is not considering to donate the RM30 million turned down by MCA to Xingquan. Or is he? And I believe philanthropist like him has some reputation to live up to. It is like Francis Yeoh is now into the Wimax biz which might be foreign to him 10 years ago but surely he is not investing in the biz just to keep him busy. It is all for making money. Similarly, I believe this is true to Koon Yew Yin too on his foray into Xingquan.

Moolah said...

Quote: He is rich for his smartness in stock-investing or other reason(s) but one thing placed right in front of us is that he has sizeable amount of money in Xingquan.

Err.. firstly... please understand I am NOT saying I am correct. In fact, I certainly am well aware that I am flawed in many ways.

Now... in regardless to the 'smartness' issue. All I would say is... what if he's wrong?

Would that not be possible?

Take some of the rich ppl around. Hey, take good old Unker Kuok.

:=)

As rich as he is and as smart as he is in his investing and business, has Unker Kuok made any mistake before?

Well... I am sure that you know the answer very well.

But... that mistake... was probably as they say... a spit in the ocean for him. He could very well take the millions in losses.

However, what about the 'smaller' investors?

Could they handle it if they are wrong?

( Ooo... do not crucify me for this is the stock market and I would NOT dare suggest one could NEVER make money in this stock or this stock is a certain loser.)

Yeah... isn't it funny that they probably know 'something' that we don't?

You know.. whenever there is bulk buying... ppl always say what if they know something we don't (hmmm.. how come no terbalik asking? :P maybe he doesn't know what we know?) and ppl tends to get bullish over this. But when it comes to 'shareholders'/'insiders' selling, ppl tend to discount it. :P

LOL! Yeah.. funny eh?

And oh... back in 2004 or is it 2005, a huge stake in DRB was sold. What was the price then? Was it 3.20? or 3.50? or 3.60? I can't remember but if the investing public had followed based on that buying, look at DRB today.

Ahh... but then ... there are also countless success stories. :=)

xinzhang said...

I guess we should look into Xingquan in a more perspective manner. Snowball was right that the interest rate regime in China is low and it is something which no one could argue or debate. So, in other words, the Chinese is encouraging people to take money out and invest and spur the economy.

The apparent higher receivables reported by Xingquan is definitely a cause of concern but not to an extent where we should just ignore the prospect of investing into this company. Question like is the receivables are within its credit term? I have no idea as to its ageing list but surely they are not selling on cash basis. Do they have any bad debts? If no, then the high receivables are not a concern as you will have higher receivables as business grow. The important thing is to check if they are within credit limit and term.

Xingquan is lacking on dividend as correctly pointed out by Mosea. Yes, for any investor, dividend is something that they are looking up to apart from price appreciation. But Xingquan has caveat this by presenting to all and sundery that they are paying from 10% to 20% of its PAT.

Xingquan should be paying up for the expansion completed recently. And the issue is how much business have they managed to get for this new plant.

And my last advise is will there be more funds interested in this counter apart from Mr. Koon Yew Yin. Having Koon Yew Yin on board is a good thing boosting investors' confidence.

tklaw said...

Hi Moolah,

If we take the lowest annual interest rate 0.81% for 1 day deposit at call in ICBC, the sum of capital required is RMB 247 million for receiving interest income of RMB 500k. Given average cash on hand RMB 609 million [( 587+631)/2], where has the balance RMB 362 million (609-247) gone?

This amount is exceeded last quarter turnover RMB 347 million. Can I assume that each outlet keep 3 months cash sales of RMB 181k ( RMB 362 million / 2,000 outlets ) in a safe for emergency purpose?

Moolah said...

tklaw: Exactly. Snowball too raised this issue. :/

As it is.. xingquan said it has tons of cash.

But what good is the cash?

Is it getting the 'interests'?

Is it paying dividends to the shareholders?

And the company wants to raise more cash via TDR.

Reason given is... cash is to be used for capex.

How?

tklaw said...

I guess the reason is cash was not kept by the company at all times. Sales to outlets could be channeled through an agent with credit term not less than 90 days. The agent will settle the debt at the end of each quarter so that the company is able to show a solid balance sheet for reporting purpose.

snowball said...

@tklaw,

Yup. Good observation. It can be that way. But, that would lead to another issue, receivables would be very high, which is not a problem if the agent pays back. Unless...

tklaw said...

Snowball,

That’s my flawed view. You would find some balance sheet figures are more interesting after making a comparison of full year results with our local known brand, Padini.

Xingguan Debtor turnover = 1 month ( RMB 118 m / 1275m x 12 months )

Xingguan Inventories turnover = 0.56 month ( RMB 39 m / 839m x 12 months )

Padini Debtor turnover = 0.36 month ( RM 16 m / 523m x 12 months )

Padini Inventories turnover = 3.52 month ( RM 77 m / 262m x 12 months )

Is it Xingguan is so good in managing its inventories in apparel industry???

Moolah said...

tklaw: WOW! You track all these numbers so in detail? :P

And what's your opinion on the recent insane surge on cotton prices?

Check this news on cbs:

http://www.cbsnews.com/stories/2010/11/22/eveningnews/main7080147.shtml

Moolah said...

tklaw: sorry clicked published... too fast. My fingers must be fat. :P

from that cbs article..

""Cotton prices are out of control right now," he said.

Weitman makes pockets for high-end jeans. A year ago a roll of cotton cost him about $230. Now it's $350, $120 more per roll. It's hitting him in his pocket.

For a while, Weitman said he'd been eating the loss. "But it's gotten to the point where people have to start raising prices and it's affecting everybody," he said.

tklaw said...

Hi Moolah,

I should give them a credit on the ways in strategizing its financial management so as to facilitate its capability to raise funds for future expansion. Don’t be surprised if this stock shoot up in future like QL. lol

Moolah said...

tklaw: hey, it's the stock market and anything can and will happen.

Here's something to ponder upon.

A casino offers many, many different kind of bets and everyday, someone will win something. :=)

:P

tklaw said...

@Snowball, Sorry for my earlier statements.

It should be Debtor Collection period and Average Inventories period instead of Debtor Turnover and Invetories Turnover respectively.

snowball said...

@tklaw,

Your flawed observation is good observation. Not sure analyst out there do as detailed analysis as you do.

One probable explanation on the vs. Padini figure may be the differences in business model? I think Xinquan does not own their distribution channels. When the things goes out to the agent, it reduces their inventory days and increases the debtors days. That's may be the reason why Padini, which I think owns the distribution channel, is good at one things, Xingquan is good at the others.

But, I am not sure whether Xingquan sells on consignment, if that's the case, then, all the stuff I write above is wrong.

Another reason may be that Xingquan has maxed out its factory capacity. So, all the stuff they produce is just enough to meet the current demand. This may explain the low inventory days.

tklaw said...

@Snowball,

I agreed with your point of different business model between two companies. That’s why debtor collection period for Xingquan much higher than Padini. I reckon Xingquan may face much higher credit risks since it would probably depend on few main agents or distributors payment in the end of each quarter.

It’s very unlikely for Xingquan to sell the products on consignment basis by stating the terms clearly in distribution contract given its low inventories level.