Friday, February 18, 2011

Review Of Xingquan's Earnings

Blogged several times before:

Xingquan announced its earnings.

Here's the updated numbers.

  1. Yeah, there's visible growth in sales revenue....
  2. but where's the profit???
  3. Cash... yeah... capex.... but... it shrank so much????
  4. And then.... the ..... increase in receivables .... is simply .... crazy!!!

What's up?????

Here's how Xingquan the stock is performing...


snowball said...

Perhaps the shoes and clothes are not selling as well on their distributor side which explains the increase in receivables as inventory still remains with the distributor, hence, they can't pay XQ back. I won't be surprised as companies like Li Ning and Dongxiang are facing slowing sales and having troubles with their distributors.

Margin contraction, don't know if it is due to increase in raw material cost or one-time store opening charges. LOL, they are able to increase prices when competitors are lowering prices.

Moolah said...

Well it's possible.... but the size of increase is simply mind boggling!

Nakata said...

PAT was hit by 6.6% tax rate increment, Revenue increase 19% from previous quarter and 14.1% compare to corresponding period in preceding year and factory just started operating with full capacity

Moolah said...

Nakata: What's up!!!! :)

Hmm.. so Xingquan's PAT was hit by 6.6% tax rate increment.

This quarter's tax expenses was 11.743 million. The previous year same quarter tax expenses was 6.050 million.

However... let's look at the PBT. This quarter, PBT was 33.204 million. Previous year PBT was 32.458 million.

Without bringing out the calculator, despite the incredible increase in sales revenue, the PBT only increased very slightly.

And accordingly, millions was spent on new plants and factories. So where is the returns? Where is the justifications?

Did you see how cash diminished?
Did you see the incredible surge in receivables?

ps: in investmnets, some like to see companies where these companies constantly shows to their investors why they are good. Which defers from companies, where the investor constantly have to dig out information on why the company did not do so well.

solomon said...

It is going to hit in the coming few quarter result. Presuming the debtor ageing is 60 to 90 days, it explains that the credit sales by then cannot be collected. If they are from the same batch of customer, i think credit collection will have problem. It going to depend on the collection skill then. Going to worsen by sluggish sales....if exist??

Moolah said...

Yeah, the sudden drastic increase is a serious concern and the gratest worry is when the receivables cannot be collected and had to be reclassified as doubftful debts (which ultimately leads to losses!).

Receivables increased by 94.7 million for the quarter! This works out to an increase of over 108%!!!!!!!!!!

And cash balances went from 291.104 million to 176.513 million.

Some would argue that the cash would improve back since Xingquan's TDR program has been approved. (The TDR should bring in some 76 million to its coffers).


the lack of earnings is now a worry, since the TDR will cause a dilution of EPS by 15%!

No earnings gorwth, earnings in fact decline and when one factors in the future dilution of earnings by 15%........ ouch!

Nakata said...

The new factory have been started just Feb and believe is not in full capacity yet(correction of my previous thread), would it caused the high jump of receivable from recent sales ? if this is justified, then i believe Xingquan is on right track.

Moolah said...

Quote: The new factory have been started just Feb and believe is not in full capacity yet(correction of my previous thread), would it caused the high jump of receivable from recent sales ?

I am sorry but I am lost. How would this new factory cause the jump in sales receivables?

Nakata said...

Sorry for confusion, i posing the possibility of increased revenue(14.1%) are from the new factory which is just operate in Feb, if that's the revenue from new factory, and the receivable will be increase due to credit term of 60 days.

Moolah said...

Ah yes. If sales revenue increased a lot, then it's understandable to have an increase in receivables too.

However, is this the case for Xingquan?

Compared to the previous quarter, sales increased from 160+ million to 190+ million.

However, receivables increased from 87.6 mil to 182 million! Yup, receivables increased by 94.7 million for the quarter! This works out to an increase of over 108%!!!!!!!!!!

Me? I cannot understand what's happening here.

snowball said...


I think the financials are for quarter ended 31st Dec right? The new factory should not cause this jump as it just started in February.

The jump in inventory may be an indication of their distributor are having difficulties to clear inventory which means their shoes is not selling well on the shop level, not really a good sign. Nike and Adidas are cutting prices to go into tier 2 and 3 cities, the segment in which XQ is targeting. So competition are heating up. Labour cost, according to Chinese factories owners are estimated to go have double digit growth PER ANNUM. Shoe companies are very labour intensive, so, should be careful.

Nakata said...

Thanks Moolah and Snowball pointing out, the report is up until 31 Dec 2010, it sound to me this is first time XQ fall out of expectation, do you guys still confident on it next quarter XQ can come out better one since the new factory in operation mode now?

Moolah said...

Nakata: Ok, some of the reasons given that Xingquan is an investment opportunity.

1. Low 'PE'
2. 'good fundamentals'
3. A reputatble local investor bought shares into it.
4. Proxy to China market.

Now take a step back.. and look at the earnings summary posted in the posting:

So far, we only have six quarters of earnings.

Can we declare this to be a great company?

If it's a great company..

a. where is the growth in 'earnings'?
b. why is the margins declining?
c. why is the cash depleting?
d. why is the receivables increasing? (10 Q1 receivables was only 68 million. 11 Q2 receivables is at a whopping 182 million!)
e. the loans are increasing too!

Does this looks like a great company?

If it's not... why insist on this stock?

Kopi Sim said...

Hi Guys,

I am a buy side analyst and have been attending XQ's results presentation.

In their slides, XQ has informed that all outstanding debt have been collected. Their normal collection period is ard 45-60 days and they will not release the new stocks unless the distributors pay the old debt.

From my observation in China shoe and apparel companies, the bigger boys (those with >4,000 stores like Lining, Anta, Xtep, 361, Peak, Hongxing Erke, Dongxiang Kappa) are facing issues like high inventory simply because they have 2-4 shops selling the same brand in a 200-300 meter shopping street. So, sure have inventory issues and then receivables like Hongxing Erke.

As for their new factory, they just started with their new factory, i estimate they will take 3 months to get back to where they are first and then the next 3-6 months to increase further. If they tell us they can increase immediately, then it is illogical. Moving to a new factory and to restart takes some time to adjust. So the additional figures should only come 2H this year.

As for their drop in cash, the management has mention this since August 2010. The new factory, rebranding exercise, purchasing part of the old factory - all will take up at least RMB400-500 million. So the drop is expected.

The only suprise is the change in tax rule in relation to provision of deferred tax - in accordance to IFRS. They have to make provision of up to 10% of their profit but will adjust back at the end of the year. So, come year end, the profit will shoot up again.

Kopi Sim said...

Also, XQ is not a sports wear company. They are now an outdoor wear company and their nearest competitors or their neighbours in department stores are mainly Jeep and Camel. Basically, this is rather a new market/concept/design in China (3-4 years i think). So XQ basically has first mover advantage. Imagine, 15-20 years ago in Malaysia when we start to wear Timberland shoes.

So, XQ should not be compare to sportwear companies like Lining, Anta, Xtep, Nike, Addidas and etc. Personally, i think sports wear industry in China is to crowded, simply because a same brand will have 2-4 shops in a street or shopping mall. If you take the annual /research report of the top 10 China brands and you add Nike, Addidas and Puma, you easily can get more than 50,000 outlets. So, isn't it too crowded for sportwear industry and that is why most are going to have a single digit growth in the future. Some may even go into what XQ is doing.

snowball said...

@Kopi Sim,

I am surprised to see a reply on such a old topic. Just shows you the attraction of Xinquan. I know Koon Yew Yin is a major shareholder, but, no matter how good an investors is, the strike rate of the best is probably 9/10. You never know this is Koon Yew Yin's 1/10 investment...

Since you are an analyst, you should have better resources at your disposal. Hope you can ask for clarification from the management on the low interest that are being received by them. Please check on how they are spending money on the plant expansion, whether the land being acquired is at fair value. Who own that piece of land previously? Normal retailers like us have no resource at our disposal to do such extensive due diligence.

The fact remains now that receivables has jumped, it has spiked at a much faster rate than sales. Yes, management may be telling us that they release inventory only when the customer pay them back. But, the current quarterly number do not seems to suggest so. The slow payback also suggest inventory problem since they do not do consignment sales, so, the first indicator of problem is in the receivables. It may be seasonal, we will never know, but with your resource, I think you can ask the management and get back to us.

Try do a baidu search on what the Chinese perceived Addnice as a brand. The last time I search, the feedback is not that positive. I am not sure whether it is still the same. Perhaps, views has changed, but, the last time, they are perceived as an imitator of adidas due to the similarity in chinese character between the two. It is like Nike and Niki, what do you think of Niki as a brand? Prestigious or Copy cat?

Yes, the management are saying they are an outdoor sportswear company. But, does it really matter what the management says about their product when their customer perceived them as just another sports company? I personally treat things Nike shirts and Camel shirts as similar.

Plus, what is the management plan in tackling wage increase. Victor Li of Li and Fung (probably the most authoritative figure to talk about Chinese supply chain) said that industry people (i.e. not analyst) thinks that wages will grow double digit per annum on the next five years. How did XQ plan to tackle these?

In view of the recent increase in frauds in Chinese small caps around the world, I think more due diligence is needed. We could not possibly know which one is honest which one is not.