Cheung Woh Technologies

Cheung Woh's Q1 (ended 31May11)-FY12 results (first released on 11Jul11) makes interesting reading.....
http://info.sgx.com/webcoranncatth.nsf/V...A002CA521/$file/CheungWoh_Results_Announcement-1QFY12.pdf?openelement

This is the first time Cheung Woh is doing quarterly reporting. While the lower GP and GPM, and the much lower (-47.3% yoy) PBT of $3.806m, do pose as a cause for concern, we should bear in mind that the lower PBT is after accounting for a smaller (by $150k) forex gain, higher (by $240k) amortisation & depreciation expenses, higher (by $266k) interest expense, and much higher (by $755k) R&D expenses. It is also worth noting that Cheung Woh has continued to generate healthy cash flow from operations, and managed to reduce gross borrowings by some $5.2m, and nett borrowings by some $4.1m, when compared with the 28Feb11 year-end position.

A relevant question: Are the worst-off Q1 results only a blip, or a precursor of a decline in Cheung Woh's longer-term profitability?

Good informative summary dydx,

I am vested in Cheung Woh and I found this latest quarterly results report a rather depressing read. I am particularly concerned regarding the numbers and narrative on CW's costs & expenses - costs for distribution, administration, R&D, financing, sales are all going in the wrong direction. It is not clear to me from the report what the driver was for the hike in R&D costs. The report also mentions a "softening of demand" for CW's Precision Metal Stamping products and heightened inventory levels ........ but the extent of the Japanese Tsunami's impact on all this, while referred to, is not quantified even qualitatively. I worry that something a tad more structural is at play here.

More important than these words however, is the reality that Mr. Market is clearly also depressed. The shares are currently trading at S$ 0.22, ~ 14% lower than CW's pre-results announcement level. I will stay vested for the time being - I like the management, the major shareholding family who have consistently maintained their shareholding through thick and thin since listing at end 2002, and I like the prudent approach to financing. But dydx poses the critical question at the end of his post above and I hope the management realises the importance of getting costs back on track to render the Q1 results a blip.

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the Q2 manufacture industry result was quite bad. maybe an indication of how would the company perform in Q2 and later half year

(14-07-2011, 07:20 PM)freedom Wrote: the Q2 manufacture industry result was quite bad. maybe an indication of how would the company perform in Q2 and later half year

I think it will be a big mistake if investors use Singapore's quarterly industrial production statistics to gauge Cheung Woh's current and future business/financial performances. As a big portion of Cheung Woh's production capacity is based in PRC and Malaysia, we can therefore assume that most of Cheung Woh's production and sales would originate from outside Singapore. Do refer to p99 of the latest FY11 AR to have an idea on the locations of Cheung Woh's owned
production facilities and their scales....
http://cheungwoh.listedcompany.com/misc/ar2011.pdf

Based on the company's website, Cheung Woh is now a regional group employing some 3,400 staff over 9 locations.

(14-07-2011, 08:54 PM)dydx Wrote:

(14-07-2011, 07:20 PM)freedom Wrote: the Q2 manufacture industry result was quite bad. maybe an indication of how would the company perform in Q2 and later half year

I think it will be a big mistake if investors use Singapore's quarterly industrial production statistics to gauge Cheung Woh's current and future business/financial performances. As a big portion of Cheung Woh's production capacity is based in PRC and Malaysia, we can therefore assume that most of Cheung Woh's production and sales would originate from outside Singapore. Do refer to p99 of the latest FY11 AR to have an idea on the locations of Cheung Woh's owned
production facilities and their scales....
http://cheungwoh.listedcompany.com/misc/ar2011.pdf

Based on the company's website, Cheung Woh is now a regional group employing some 3,400 staff over 9 locations.

but I thought there are quite some companies recording their sales in Singapore, but manufacturing in China, Malaysia?

the Geographical segments in AR use the location of customers, instead of where the sale is made. I am not sure where their sales were recorded.

Just checked my bank account and noted a nice credit from Cheung Woh's $0.01/share Final dividend for FY11 (ended 28Feb11). Feeling happy!

I now look forward to the coming Q2/H1 (ending 31Aug11) results expected by 15Oct11, and the Interim dividend (last FY10: $0.005/share) which is usually paid out in Nov.

All,

First up - I am vested in Cheung Woh - and I'm pleased that the share price has come off its recent low.

Secondly - I do not think I am alone in noticing the highish turnover in Cheung Woh shares today, 722,000 in all; some 506,000 shares were traded in the last 55 minutes of trading alone. This is by far the highest turnover level since end April. Cheung Woh ended up today, closing at S$ 0.245.

I also notice that Cheung Woh made a post closing statement regarding a disclosable M&A transaction pertaining to a subsiduary doing business in China. And it appears this transaction is accretive to net asset value.

Today's (20Jul11) announcement on Cheung Woh's re-structuring and partial disposal of its 69.388% beneficial interest in the PRC-based Automotive Components Div. - held under Suzhou Tysan Precision Engineering Co Ltd (TP) - is an important transaction....
http://info.sgx.com/webcoranncatth.nsf/V...600018977/$file/Cheung_Woh-TC_Restructuring_Announcement.pdf?openelement
http://www.tysan.cn/english/gsjj.asp [TP's website]

Present position: Cheung Woh's 69.388% (73.04% x 95%) beneficial interest in TP is held through 73.04%-owned subsidiary Tysan Corporation P/L (TC), which in turn holds a 95% interest in TP. The remaining 5% of TP is held by Singapore-based ZMC Engineering P/L (ZMC). PRC-based Changshu Zhongming Automobile Parts Co Ltd (ZMA) holds the remaining 26.96% in TC, and is Cheung Woh's key partner in TP.

At the end of the proposed re-structuring: Cheung Woh will own a direct but reduced 33% interest in TP, and ZMA will emerge as the largest shareholder of TP with a 64.7% direct interest (up from its present 25.612% beneficial interest); ZMC will reduce its interest in TP from 5.0% to 2.0%, with the remaining 0.3% interest in TP going to Wan Wing Tai, Cheung Woh's General Manager - Engineering. With such a simplified shareholding structure, TP will be better placed to raise new capital to support its growing business.

Essentially, the re-structuring will entail ZMA and Cheung Woh buying the shares in TP from TC to be settled in cash, using TP's NTA as at 30Jun11 as valuation basis. Under the S&P agreements signed, ZMA will have to pay TC a total of approx. USD15.69m (to be settled in 2 payments, with the 2nd payment of approx. USD9.21m payable by 28Feb12); Cheung Woh's payment to TC of approx. USD8.35m will be largely via settlement of existing intercompany balances. The re-structuring will also entail TC distributing the nett cash proceeds from the sale/transfer of its shares in TP, back to Cheung Woh and ZMA by way of (a) a planned concurrent capital reduction exercise - reducing TC's share capital from approx. $14.6m to approx. $3.5m - and (b) dividend payments after each of the 2 payments from ZMA.

While the proposed re-structuring is expected to lower Cheung Woh's profits and EPS going forward - as upon completion, TP's earnings will no longer be consolidated into Cheung Woh's accounts, but only a reduced 33% share of TP's earnings be be accounted for under earnings from an associate - it will rid the financial burden related to TP's increasing R&D expenses and working capital requirements, and allow Cheung Woh to realise a big portion of its investment in TP to-date in cash. At the end of the exercise, Cheung Woh is expected to emerge with a large nett cash reserve.

A relevant question: Will Cheung Woh be prepared to reward its shareholders will a big dividend payment?

Singapore Companies
Published July 21, 2011

Cheung Woh cutting stake in China unit

Company plans to focus on its hard disk drive business

By CARINE LEE

CHEUNG Woh Technologies is relinquishing control in one of its twin growth drivers - the automotive component arm in China - to focus on its HDD business. The restructuring move will result in Cheung Woh slashing its effective stake of about 69.4 per cent in Suzhou Tysan Precision Engineering (TP) to a direct stake of 33 per cent.

This will give the automotive component unit 'a free hand to have its expansion' in the booming sector, said Cheung Woh chairman Law Kung Ying in a briefing.

The mainboard-listed manufacturer and supplier of precision HDD and automotive products announced yesterday that its 73.04 per cent-owned investment holding subsidiary Tysan Corporation (TC) has entered into agreements to sell its 95 per cent stake in China-domiciled TP - 33 per cent to Cheung Woh and 62 per cent to Changshu Zhongming Automobile Parts (ZMA).

Cheung Woh will pay - through inter-company arrangements - about US$8.35 million for the 33 per cent stake. ZMA will pay about US$15.7 million for its 62 per cent stake. ZMC Engineering, which owns 5 per cent of TP, will sell a 2.7 per cent stake to ZMA and a 0.3 per cent stake to Cheung Woh executive officer Wan Wing Tai.

The end result is that TP will be 64.7 per cent owned by ZMA, 33 per cent by Cheung Woh, 2 per cent by ZMC and 0.3 per cent by executive officer Wan. ZMA owns 100 per cent of Sino Zhong Ming, the firm which owns the other 26.96 per cent of TC.

Cheung Woh is giving up control of a unit which had contributed 41 per cent of the group's revenue in the last financial year and outpaced the growth of its largest revenue contributor, HDD components.

Mr Law said: 'We are able to sell at a good price, more than enough to recover the cash investment for the 33 per cent. We also identified an opportunity in the HDD business with the merger of Western Digital and Hitachi Global Storage Technologies. We believe it will be a growing business in the future.'

In its announcement yesterday, Cheung Woh said the restructuring is to realise its investments in Suzhou Tysan.

In March, Western Digital, a key customer of Cheung Woh, announced it will buy Hitachi's disk drive business for US$4.3 billion in cash and stock. Mr Law expects the deal to be completed in September.

If the Western Digital deal is successful, Cheung Woh needs to be positioned to ride the potential increase in demand for HDD components, Mr Low said. So it plans to expand its HDD facilities in Johor, Malaysia as 'China no longer has the cost advantage'. In addition, Cheung Woh is focusing its expansion plans on Johor for management and logistical reasons.

Looking ahead, Mr Low said shareholders can expect average results in the current quarter, which will be 'not exceptionally good and not exceptionally bad'.

Cheung Woh's shares closed trading yesterday up 1.5 cents at 24.5 Singapore cents.

Business Times - 26 Jul 2011

Hock Lock Siew
Why would Cheung Woh put all its eggs in one basket?

By CARINE LEE

MOST companies would welcome having not just one but two core business segments that are profitable and growing. Yet, one mainboard-listed company is in the process of selling off control of its largest growth segment to focus on a business that hinges on the prospects of one big customer.

In a surprising move, Cheung Woh Technologies Ltd last week announced that it is slashing its exposure to China's robust automotive industry to focus on its hard disk drive (HDD) business. This seems counterintuitive to the company's full-year results for the period ended February 2011, when sales for its automotive component segment outpaced its HDD component growth.

Cheung Woh boasted a record net profit of $17.4 million for FY2011, and credited this success to the 55.8 per cent year-on-year growth in its automotive component segment. In comparison, its HDD components segment grew only 12.5 per cent.

While sales of HDD components remained the largest revenue contributor of the group at $67.3 million (44 per cent), its automotive component segment was not far behind with sales of $62.5 million (41 per cent).

Going by these numbers, the automotive segment would appear to be a business that Cheung Woh should want to develop further. Just by extrapolating FY2011's growth rates, the segment seems on track to overtake the HDD business in the near future. According to a Daiwa Research report, passenger vehicle demand is expected to grow 12 per cent year on year in 2011 in China, and Cheung Woh stands to benefit from China's wide range of domestic carmaker customers.

The company itself said that its gross profit margin remained relatively stable in FY2011 particularly because it holds the ownership of designs for automotive components, which gave it the flexibility to make the adjustments needed to maintain margins.

Yet, in mid-July, the company said that it is cutting back its interest of about 69.4 per cent in Suzhou Tysan Precision Engineering, its China automotive unit, to 33 per cent, so that it can focus on its HDD segment.

What could have happened in the last three months that caused the local company to decide to relinquish control of a fast-growing unit for one that has low barriers to entry? It also seems to go against the trend of more companies trying to get into the fast growing China auto sector.

In its SGX filing, the company said that the transaction 'will enable the company to realise its investments' and 'enhance the group's financial position by maintaining an optimal corporate and capital structure'.

According to a SIAS Research report, this is Cheung Woh's way of relieving itself of additional borrowings and financing costs should the automotive subsidiary require more capital to expand alongside the development of new products and new customers.

Value enhancing

If Cheung Woh returns the cash to shareholders or invests it in more profitable ventures, this divestment will come across as more value enhancing, it added.

However, Cheung Woh plans to invests in its HDD business, which it believes will grow with its major customer Western Digital acquiring Hitachi Global Storage Technologies.

It's not a plan without risks. For Cheung Woh to offset the loss in profits, SIAS estimated that the company needs to increase its non-auto parts revenue by an equivalent of 12 per cent of its FY2011 HDD sales. It also needs to ensure that the additional cost savings from improving the HDD production programme would offset the decline in net attributable profit from the auto parts unit.

The other question is whether Cheung Woh is taking too big a risk with betting on just one customer. Western Digital may be a key customer of Cheung Woh, and may hold nearly 50 per cent of the HDD market share upon the successful acquisition of Hitachi. But this means with the diminished contribution of the automotive segment, Cheung Woh fortunes will be closely tied to that of Western Digital. And it cannot be assumed that Cheung Woh will always remain a major supplier for Western Digital's HDD components.

The company may have some explaining to do to its shareholders, should things not go according to plan.