Thursday, August 23, 2012

Guan Chong's Aborted Listing Plans And Its Earnings

One of the stocks in highlight was Guan Chong when it suddenly withdrew its plans for a secondary listing on Singapore. The reason Guan Chong gave left much to be desired.

From a report on the EdgeMalaysia:

  • Instead, in a statement yesterday evening, Tay said: “After much consideration, we wish to reassess our strategic direction with regards to capital requirements for expansion.”

    “The group remains committed to expanding our global reach and broadening our profile as one of the leading cocoa processors in the world, going forward. Ultimately, we remain focused on implementing growth strategies to bring sustainable benefit to Guan Chong,” he added.
Surely, it could come out with a better explanation than the above, since the market was rather hyped with its secondary listing plans. Many had hoped that the stock could reach new highs with the said listing.

'To  reassess our strategic direction with regards to capital requirements for expansion? What exactly does that mean? A dual listing was said to be a good source of funding for Guan Chong's capital requirements. Why the need to reassess its strategic plans in the 11th hour?

Guan Chong's exact statement on Bursa Malaysia:
  • We refer to the earlier announcements in relation to the Secondary Listing and Bonus Issue. On behalf of the Board of Directors of GCB, Hong Leong Investment Bank Berhad wishes to announce that the Company does not intend to proceed with the Secondary Listing on the SGX-ST for the time being as the Company wishes to reassess its strategic directions with regard to capital requirements for the expansion of its business.
Surely Guan Chong could have been more professional and more transparent in explaining why it is abandoning its listing plans.

As the EdgeMalaysia rightly stated:
  • The company’s statement did not specifically say if the exercise had been pulled due to weak market conditions or if Guan Chong still needed to comply with additional regulatory requirements for its Singapore dual-listing.
Yes, did Guan Chong secondary listing complied with requirements?? Was this the reason for the aborted listing plans?

Also another good point made in that news report was:
  • Nonetheless, one analyst who tracks Petra Foods Ltd in Singapore pointed out that Petra Foods, which is larger and more established, had in their recent earnings announcement for the second quarter ended June 30, 2012, flagged that margins for it cocoa processing business had been hit by over-capacity in the industry.

    Another Johor-based cocoa-ingredients processor, JB Foods Ltd, which debut on the SGX last month closed below its IPO price of 30 Singapore cents per share yesterday (Thursday, Aug 16). It added 1 cent or 2.39% to close at 30.5 cent today.
Now Guan Chong was a stock that I had blogged and reviewed before. Guan Chong had performed remarkedly well despite the concerns I had posted. See I am no market doomslayer! I have no voodo stick that could cause a stock to crash :P

Guan Chong's superb stock performance for the past two years.

Here are my past postings on Guan Chong:

Aug 9, 2010: Review Of Guan Chong's Earnings
Aug 10, 2010: Update On Guan Chong's Posting
Feb 1, 2011: Update On Guan Chong's Earnings
Aug 12, 211: What About Guan Chong's Earnings

Now this indeed is rather interesting. The concerns against Guan Chong is rather justfied but yet the stock moves against one's reasonings.

Is our reasoning wrong because the stock market said so?

Which rather messes with one. Are we really wrong? How could our reasoning be correct, when the stock market is sending the stock to the moon? Should we abandon our reasoning and just do what the market says? How could a fundamentally flawed stock moves up so high??

Yeah, it could drive one crazy.

Maybe I should just fold and admit that I am terribly flawed (as usual. :p)

Guan Chong reported its earnings last night. Hence, I was rather interested to review its earnings. Perhaps I could learn more... :)

Here's the link: GCB-2ndQ2012 Interim Financial Statements.pdf

Before I go in the details here's an interesting article on the Edge back on Jan 2011:
  • For nine-month period, Guan Chongs's revenue nearly doubled to RM836.3 million from RM424.8 million. Net profit soared more than seven-fold to RM56.17 million from RM7.66 million in the same period a year ago. (the soaring earnings)
  • Johor Baru-based Guan Chong is an upstream cocoa processor that converts raw cocoa beans into semi-complete ingredients like cocoa butter, cocoa cake and cocoa powder.
  • “Our prospects are good moving forward. Sales have indeed been great,” Tay added.

    “You see, whether at high or low prices, the big boys have to buy cocoa from middleman like us. Once we use our supplies, we immediately hedge it on the futures market to replenish the stock for the coming already kept this [increasing raw material costs] in mind when making their orders,” he explains. ( we will come back to this 'high and low prices' later.)
  • A one-month ban on cocoa exports from Ivory Coast, the world’s biggest cocoa producer, has added more upward pressure on prices. Cocoa prices rose to US$3,366 a tonne yesterday, from US$2,745 in late August last year.  Commodity analysts quoted by news agencies say that prices might even soar to the US$3700-level, the highest since 1979, should the supply of cocoa get even tighter. (ah,.. the soaring cocoa prices)
  • The stock surged to a record high of RM2.72 yesterday, up 51% from RM1.80 in mid-December. Analysts say the company’s improved financial performance could be attributed to the large stocks of raw cocoa beans it keeps in storage, which is now worth much more based on current prices.
Another article on March 2011:
  • On the impact of high cocoa bean prices, Tay said the soft commodity, which was traded at a 32-year high of US$3,706 a tonne yesterday is not expected to hurt Guan Chong’s financials because the company is able to pass the additional expenses to its customers. “We buy high and sell high,” Tay said. He added that existing high cocoa bean prices may lead to less competition in the cocoa processing industry. (buy high and sell high???? )
Feb 2, 2012:
  • For instance, cocoa futures for March delivery were up by as much as 15.9% from US$2,028 (RM6,165.12) per tonne on Jan 9 to US$2,350 per tonne on Jan 12. However, prices are still low compared with a peak of US$3,593 per tonne in March 2011. (cocoa prices have plunged since hitting the highs last year! )
  • “We sell forward as far as a year [into next year] and stock up more than two months of our needs of raw materials,” Tay said. (ahh... they claim they stock 2 months inventory)
So now we have a rough idea on what's Guan Chong's about.

Let's review the blog postings:

Aug 9, 2010: Review Of Guan Chong's Earnings
Aug 10, 2010: Update On Guan Chong's Posting
Feb 1, 2011: Update On Guan Chong's Earnings
Aug 12, 211: What About Guan Chong's Earnings

Now what I would now do is compare those concerns posted from those blog postings and compare it versus Guan Chong's latest earnings.

Would such an  exercise make sense?

If say our concern was on cash back then, and current cash level now is lower compared to back then, wouldn't it suggest that our concern was justified?

From the first blog posting on 9th Aug:

The concerns was on the cash versus loans and receivables.

Here's a screen shot from Guan Chong's current earnings.

1. Trade receivables. Down to 111.800 million. Ok this has improved a lot.
2. Cash. Cash today stands at 27.361 million. Improved but we need to review its loans.
3. Inventory. 512.4 million???? Say what?????

Ok, I have to jump right in to the inventory issue since it's staring right in the face from the screenshot above.

From a comment from the posting on Feb 2011:
  • K C said:  it appears that almost all of GC's profit is from coco future (and stocking up of inventory of coco)
The high inventory issue highlighted before in 2011 has gotten insanely high! Why on earth is Guan Chong keeping such an insanely high inventory level???

Remember from the news article on the Edge on Feb 2, 2012:
  • “We sell forward as far as a year [into next year] and stock up more than two months of our needs of raw materials
The company claims to stock up more than 2 months of its raw material needs. (which is justifiable)

However if you look at Guan Chong's sales revenue for the current quarter, its revenue is at 312.8 million or roughly a sales revenue of 104 million per month. But from its earnings notes, Guan Chong inventory is now at a staggering 512.4 million!!!!!

What? What? What?


Now back to Guan Chong's cash/loans issue.

Guan Chong's loans is now at a staggering 510 million! When I first posted on Guan Chong ( Review Of Guan Chong's Earnings ), Guan Chong's loans was only 243.233 million!!!!

This would mean that Guan Chong's financials had only gotten worse since 2010, yes? They now owe the bankers so much more money.

Yeah, they now have so much more inventory too!

Is that a consolation?

How? How would you rate this concern? Has this concern gotten worse?

And needless to say, it's so alarming to have the company boss declaring a 2 month stock policy a couple of months ago (on Feb 2012) only to have his statement contradicted by the company's accounts!!!

Next we see the cash flow...

We can see...

1. The purchase of 'property and plant'...
2. The significant increase in bank borrowings. Loans increased by some 65.2 million!
3. Dividends increased. Guan Chong dividends payout currently stands at 26.9 million. Last fiscal year Guan Chong only paid some 7.1 million in dividends for the current period.

How? Guan Chong clearly needs funding, yes? It's bank borrowings is forever increasing. If so why again is Guan Chong abandoning its secondary plan listing? And again, why is Guan Chong paying out so  much in dividends when it is clearly need of financial funding? We can clearly see that the dividends payout was ONLY helped by that significant rise in borrowings - borrow more to pay more dividends???!!!  Make any sense?

And then we have the issue brought up by K C.

Is Guan Chong (GC) an upstream coco processor or a derivatives speculator? .

From the posting back on Aug 2010: Update On Guan Chong's Posting

Now here's the latest update:

What do you see?
What do I see?

Ok, no doubt there's much lesser money in the derivatives but where the money is at is utmost glaring!

Guan Chong has now put more money into the Forex contracts and much lesser in the commodity futures contracts.

Well.. the Ringgit versus the USD has shown some wild swings recently.. and the cocoa prices are not booming anymore.... or...commodities futures not hot, forex very hot!


Whether Guan Chong is making money via these contracts is rather immaterial for me. The fact that Guan Chong shifted so much more money into forex market, only suggests that Guan Chong looks much more of a trader. ( But hey this is my opinion... and what's yours?)

So how?

The concerns back then in 2010 versus the concerns now. Have the concerns gotten worse? Were the concerns justifiable?

ps: I have no idea how this stock will trade in the future... :P
ps: I find Guan Chong's explanation on why it is abandoning its secondary listing to be so pathetic!


Moolah said...

JB Food's earnings showed huge contrast..

For the first half of the year, the company suffered a 11.4% year-on-year drop in net profit to RM22.5mil while revenue declined 21.3% to RM271.6mil.

JB Foods told the Singapore Exchange (SGX) that the lower revenue was mainly due to lower cocoa bean terminal prices, which resulted in lower average selling price for its cocoa ingredient products.

The company also said its sales decreased by 1,556 tonnes to 22,134 tonnes in the first half of 2012, compared with 23,690 tonnes in the same period last year, mainly due to the disruption in production caused by a planned integration of expansion works-in-progress.

JB Foods, which is among the major cocoa ingredient producers in Malaysia, was listed on the main board of the SGX last month at 30 Singapore cents (75 sen) per share.

It has a cocoa processing plant in the Port of Tanjung Pelepas, Johor and its principal activities comprise the production and sales of cocoa ingredient products, namely cocoa butter, cocoa powder, cocoa liquor and cocoa cake.

agewisdom said...

Great piece of financial analysis as usual Moolah. Thanks for the informative review.

ronnie said...

Who are the external auditors of GC?

Moolah said...

ronnie: I have no idea.

The massive and sudden build up in inventory is scary.

'Maybe' some might argue that this could be due to their upcoming 'expensive' plant in Batam (ie stocking up of raw materials for their new plant) but is the plant ready?

And what's most scary is Guan Chong's huge and constant involvement in the commodities/forex market.

Moolah said...

agewisdom: Any comments from you on the stock itself?

Despite the strong stock performance, there are so many shocking developments.

1. The appalling manner Guan Chong is abandoning its secondary listing plan.

2. The insane build up in debt.

3. The insane build up in inventory.

4. Company paid more in dividends and the cash flow statement showed clearly that the dividend payout was helped by Guan Chong's increase in borrowings. Borrow more money to pay more dividends?


Big Sea said...

Guan Chong forward sell, so price fluctuation should have minimal amount of impact on Guan Chong. They should be able to make money regardless of cocoa price.

Guan Chong has factories in Batam and that give them a price advantage in raw material, so they are expected to post better result compare to peers without factories in Indonesia.

The major problem with Guan Chong's inventory level and it continues to hit new high. I have a lot of doubts about these inventory.

a). At what level are these inventories ? Raw material, finished good or purchase contract. I think we can rule out raw material and purchase contract because Guan Chong's revenue is only RM 300 mil per quarter. What for keeping more than 3 months of raw material ? [I am not good in accounting principles. Please correct if I am wrong]

b). We can compare Guan Chong with peers to see if it make sense that these are WIP [Work In Progress]. At first glance however, this does not make sense.

c). The most likely answer is finished good. I don't know how much is the price of finished good for cocoa. Assume ratio of 1 to 2.
RM 512 of inventory translates to perhaps 60,000 tonnes of product. Where is the storage ? How are Guan Chong going to store them ?
This contradicts with Guan Chong's statement that their lines are fully booked. Why book you lines when you have finished product to be picked up ?

I bought Guan Chong because of their EPS growth. I have no concern with them messing around future contracts but when their inventories keep on increasing and they show no sign of reducing it, I decide to get out. A bit lucky that I still make money on Guan Chong !

Moolah said...

Big Sea: Another issue is 'why isn't there any impact on the plunge of cocoa prices on Guan Chong at all?

I first wrote on Guan Chong on Aug 2010. By March 2011, Cocoa prices hit usd3700+ and then it corrected sharply back to us2000+. I understand that Guan Chong had publicly stated that cocoa prices doesn't impact them at all because they are the middleman and they just pass the prices along to their customers...

But what about the impact on the inventory?

When cocoa prices were increasing.. so was Guan Chong's inventory. Then the cocoa prices collapse...

So I am wondering.. what's the impact. What is Guan Chong's accounting policy on its inventory? What kind of adjustments are made to the wild fluctuation in cocoa prices?