I just read the following clip on Guan Chong on Business Times.
That article was of interest since I had blogged on this company several times before.
- 9 Aug 2010: Review Of Guan Chong's Earnings
- 10 Aug 2010: Update On Guan Chong's Posting
- 1 Feb 2011: Update On Guan Chong's Earnings
Guan Chong said it had a net profit of some 35 million for the current quarter.
So I was curious.... to have a look at Guan Chong's notes.
As mentioned in the posting Update On Guan Chong's Earnings
As posted in the posting, Review Of Guan Chong's Earnings , it was noted that Guan Chong
- .. gain from commodity future contracts and net fair value gains on foreign exchange derivatives.
This is Guan Chong's latest.
Here's Guan Chong latest info on its derivative contracts.
Some 168 million on forward forex contracts? Err..... wow!
(ps: the commodity futures contracts... its shows a minus.... compare to the previous earnings screenshot here: http://1.bp.blogspot.com/ )
Then I decided to check out the balance sheet.
Piggy bank cash only totals some 15 million.
And mind you Guan Chong owes a bit to its bankers!
Then I took a quick look at the cash flow....
Errr....
errr...... frankly.... for a company that is said to be enjoying its best earnings ever.... I lost total interest and I think you know what I mean.
BTW there's a set of comments that I like to highlight from the posting Update On Guan Chong's Earnings
- K C said... Is Guan Chong (GC) an upstream coco processor or a derivatives speculator?
Looking at Moola's breakdown on GC's profit, it appears that almost all of GC's profit is from coco future (and stocking up of inventory of coco) and currency derivative. A business is wise to hedge against price fluctuation or currency risk in order to have smooth and predictable profit, not for the purpose of an extraordinary gain. In GC's case, when coco price goes up, its coco processing operation will suffer (unless it can pass all cost increase to its client). This loss position will be approximately offset by the gain from its long position in coco, and vice versa. How did GC manage to do so well in this aspect? Pure speculation of course. It was lucky that lady luck was with GC. It could well be the other way around. In short, this type of speculative gain, is no doubt, unsustainable. GC should concentrate on how to improve its efficiency in coco processing business and hence increase its extremely meager profit margin in this operation, rather than embarking on speculation on derivatives.
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16 comments:
In any case, I believe you've mistaken inventories for derivatives..
Nony: It appears that you are correct.
Thanks for the correction.
Posting corrected. Thanks Nony.
You are so right and on the spot. Their admin are not in business but speculators. Revenue on the raise mainly on derivative transactions and they borrowed heavily on short term for this. Like to mention another company, Kwantas, who did the same few years back & lost heavily, same scenario, increased revenue & profit in preceding years.
What is the difference, inventry or derivative, if you buy forward, it can be added to you inventry.
William: "What is the difference, inventry or derivative, if you buy forward, it can be added to you inventry."
Good question. Err... not an accountant and neither am I an auditor. So I really cannot answer you on this.
Am I right to say when they involve in both commodity future purchase contracts and commodity future sale contracts, it is no longer pure hedging but involving speculation?
Ooi: Here's another perspective.
Ok... let's leave out the inventory and derivative issue...
so Guan Chong has some 15 million cash in its piggy bank versus it owes some 251 million to its bankers.
and apparently... we are talking about RECORD profits for Guan Chong.
errr.... makes you wonder doesn't it?
I mean... why the windfall isn't reflected in its piggy bank? Where is the Moolah?
how?
for their kind of business model, where a lot of working capital is required, i think their level of short term debt is perfectly ok. in fact, i would be curious if there's a lot of idle cash sitting around.
and if im right, i believe there were no funny corporate exercises like placement or rights issue so far despite the price running up? i can't remember...
it might seem they are speculating, but they have no choice but to take a position in pricing due to the nature of their business. this takes a certain skill, and i think so far, they have showed that they are quite good at it. at least for now. =)
Moolah,
'so Guan Chong has some 15 million cash in its piggy bank versus it owes some 251 million to its bankers.'
Same thing like AA?
Air Asia (AA) debts amounted to 7.7 billion with cash balances amounting to 1.7billion.
Yes?
Like to get yr thought about what IFF TF manages to parcel out the 300+ airbus he've ordered to all those LC air-travel JV partners oversea. Would this reduce AA's book carrying debts?
These other JV partners will more than willing to get a hold to these planes as order made cant be deliver overnight. Meanwhile business must carry.
Also since the delivery is scheduled over such a long period. Cant some of the earlier one be sold to recover some book values & at the same time reduces maintenance cost?
Mr. ICIC: But where is creation of 'wealth' within the company?
Last year, the company was in bumper earnings already.
This year, apparently, earnings 'improved' again.
So for all these windfall... where is the creation of 'wealth'?
CK: perhaps you could post your comments in this posting http://whereiszemoola.blogspot.com/2011/06/how-is-airasia-going-to-finance-this.html
If I understand correctly from Icapital, most of Guan Chong's customer locked the price the moment they make the purchase agreement and Guan Chong will purchase the material immediately. Guan Chong will only charge processing fee. As a result, Guan Chong should be insulated from comodity price.
I own Guan Chong. What makes me worry are :
1). If the product is in great demand, why so much inventory ?
2). inventory holding increase by 100 million, almost completely suck up the 80 million generated from operation.
3). They mention that Batam facility is already fully booked for this year and looking at setting up another facility. How to setup a facility with only 15 million in cash ? Getting from shareholder again ?
I am more worry about someone is up to something funny. The only good news is that receivables are going down.
Big Sea: If I understand correctly from Icapital, most of Guan Chong's customer locked the price the moment they make the purchase agreement and Guan Chong will purchase the material immediately. Guan Chong will only charge processing fee. As a result, Guan Chong should be insulated from comodity price.
==> Maybe that's a fair comment and logical way to do business.
However... do look into the derivatives contracts snapshot... look at the currency hedging... yes, there's a need to hedge to insulate one from fluctuatin currencies ... but... doesn't it appear excessive? See.. I believe there's an extremely fine line here... one always want to protect one from unfavourable fluctuations.. but... it's so easy to... crossover... to bet on the currency.
Me say?
I again bring forward the simple issue. Last year. Bumper year. This year, it looks the same.
However... two years of bumper earnings... ( how many millions made ) ... but.... why is Guan Chong cash versus debts position so very poor?
15 mil cash vs 251 million debts.. does this look like a company enjoying a profit windfall?
If the biz core competencies is not at Production, it may risk to have problem in later years.
It looks like a Char Kui Teow Ah Chong trading in Lard oil??
Nevertheless, all the best. So long dont get kanasai back, then good enough? Maybe there is secret strategy ordinary person cannot see now but later.
Cocoa price has collapsed over past two months. Wonder what will happen to Goncang?
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