Friday, March 18, 2011

View From The 'Buy Side' Analyst On Xingquan

Received the following set of comments from the posting Review Of Xingquan's Earnings

Now I have posted my fair share of comments on Xingquan, so I guess I should not add much to it except highlight links to my older postings.

Yes, I do understand that the comments comes from someone who has just joined blogspot but I will just let the comments speak for itself.

  • 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.

    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.

Kopi Sim explains why Xingquan's outstanding debt soared and depleting cash issue. These were the two issues highlighted in the posting Review Of Xingquan's Earnings where I had made the following set of comments.

  • 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!

Xingquan's performance since thst posting...

Some comments received...
  • 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.


ronnie said...

Warren Buffett says it best "In the short run, the stock market is a voting machine. In the long run, it is a weighing machine"

Moolah said...

Ah Ronnie, I understand that Unker Buffy says a lot of stuff but what has the weighing machine got to do with Xingquan? :)

panaceaasia said...

Li Ning has fallen from HK$30 to HK$13 over the past 12 months. What is the conspiracy theory in Li Ning?

Moolah said...

I am sorry but I do not followe Li Ning.

Moolah said...

Searched the web. Found these two article.

It should be noted, however, that not everyone shares Li Ning’s optimism for the future. Scared off by a variety of factors, large numbers of investors pulled out in December and Li Ning’s share price dropped 15% amid decreased sales order and growth. With increased competition from other companies like Peak and Anta and growing customer confusion about who Li Ning’s target audience is, going toe-to-toe with Nike and adidas is hardly going to be a two-handed slam dunk.

For now though, Li Ning seems content with settling for in control pull up 15-foot jumpers. And that’s just fine for a company who knows it doesn’t have the requisite bulk to challenge the globe’s footwear giants — yet.

In that article, there was this comment:

I have a pair of Li Ning that I bought to use for outdoor play since I didn’t want to mess up my Kobe 5′s. I used them a couple of time but they are falling apart. he fit was ok but i was disappointed with the quality. Oppositely, when I was in grade school my canvas Nike’s seem to last forever.

廖福深 said...

I like to point out Xingquan TDR is not even submitted to Taiwan authorities for approval so it is incorrect to state that its TDR has been approved. Recent TDR in Taiwan is more for very big cap company. Nevertheless, if Polaris is handling its TDR program then it should be fine as it is the most successful TDR "chonker". But TDR and ordinary shares are not fungible. Even if the TDR price goes up, its Malaysian price does not have to follow. I think Taiwan investors want companies not found in their market like oil & gas and maybe plantation counters. These are the type of TDR that can do well. Technic oil from Spore TDR (first TDR on OTC) went a few times limit up in its debut because it is the only oil and gas counter in Taiwan. An Ace company with Malaysian flavour will soon try its luck on Gretai (OTC) TDR. That will do better than Xingquan.

Kopi Sim said...

Ace market Company going to list in Gretai??? You may want to check with the Malaysian authorities first whether they allow you to do so.

Kopi Sim said...

Dear Snowball,

Regarding KYY, i read about him and his charity work but when it comes stock market, he will buy first, then move it up and then start going around promoting that company. So, i will not follow his recommendations, simply because when we go in, he will probably go out.

Coming back to XQ, in terms of the factory expenses and land acquisitions and other Corporate Governance of the Company, i believe the 2 Independent directors will do their job. I take comfort that Dato Siow who is the ID in XQ is a very experienced Director.

In terms of wage increase, it has been factored in. Their average wage is more than RMB2,500 per mth now and wage is only 12-15% of the total cost only. As such, any increase in wage is not very substantial. My concern is more on raw materials such as rubber and cotton and how much can be passed on to consumer.

Oh yes, lately, there has been quite a number of fraud/suspected fraud cases in Singapore, Hong Kong and US. So, if you want to invest in Chinese companies (from China), make sure you understand the Company very well and most importantly meet the owner (ask all the questions you need, make sure he does not gamble and is not involve in other businesses - some of the funds/investors actually get professional firm to check the background of these owners) and visit their factories (to ensure it is there and moving - make sure that there are a lot of raw materials and inventories too).