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No. of staff including temps
FY2021- 5000
FY2020- 4300
FY2019- 5200
FY2018- 3800
FY2017- 3700
FY2016- 3800
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Do you know why there is a drop in gross margin? Are they selling more lower margin disposable products?
In addition, raw material prices increase will bound to affect their margin further.
It looks like an idea to play on the opening of the tourism sector around the world. But the more direct play would be the airlines, hotels and travel destinations.
OWH
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It is highly likely that i'm too optimistic about the future prospects of MFG as ground intel paint a different picture.
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i've followed this company briefly over the years. i did glance through the latest results and i recall they attributed the decrease in margin was due to the increase in raw materials cost. that will probably apply for the rest of the year. i agree there could be a play on travel and tourism related recovery, but in ming fai's case their biggest market is china, which is probably a laggard in travel recovery, so that angle should take some time too.
in the past as ive wondered about their business now and then, my sense is theyre in a commodity like space. soaps, cleaning kits and amenities to hotels, those are basic items which should face heavy competition on price. the covid period provided a very good case study when ming fai had a temporary boost in sales because their production lines could pivot from filling bottles with soap to filling bottles with sanitizer liquid and alcohol sprays instead. so for about two or three quarters they enjoyed this short boom in business but it faded really quickly as competition eroded the advantage. to me thats a glimpse of the kind of competition they have for their products.
still, i think its low risk as its trading at or close to net cash levels. the risk i suppose is the opp cost of parking your money here.
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I believe David Webb became a substantial shareholder sometime in 2015. MFI made a loss of around HK$ 226m that year & the share price was around HK$ 0.71. They still paid a dividend of HK$ 0.07 in 2015 though. That is about a 7% yield.
I would speculate that at that time, an investment in MFI was a bet on growth in travel in China and in hindsight, this was a bet that worked until the pandemic put an end to this growth. In 2015, MFI China segment sales amounted to around HK$ 563m. By 2019, China sales had grown to HK$716m (a CAGR of around 6%).
From 2016-2019, MFI was profitable and dividend yield was between 5.6%-6.7%. In 2016, MFI paid HK$ 0.26/share as dividends. That was a whopping dividend yield of around 26% & the share price hit a high of HK$1.24 back in 2017. If not for Covid, MFI would probably have continued to be profitable & would have generated sufficient cash to sustain its generous dividend payout which would have made it attractive to income investors reaching for yield.
Having said that, as BRT mentioned, MFI is in a competitive, low growth, low margin business. It does not have a deep or wide moat. A low margin business, in my opinion, requires very competent operational management & good capital allocation skills. Any mistake or unforeseen event (such as a pandemic) & your margins disappear. As Warren Buffet says, it is better to invest in a business that any idiot can run because at some point, an idiot will run it. High margins give management some leeway to make mistakes.
MFI's operational management does not appear particularly impressive to me. In the last 10 years, either Accounts Receivable or Inventory or both grew at a rate faster than sales. Inventory turns are low. Revenue per employee has been falling consecutively for the last 3 years. Marketing effectiveness is also getting worse each year. Sales generated per dollar spent on advertising has been falling for the last 4 years. (Last year, sales generated per dollar spent on advertising fell 50% from HK$128.7m to HK$64.3m. MFI may be in need of a new Marketing Director).
On the plus side, MFI average ROIC (over the last 13 years) is a respectable 9%. The Company has a relatively strong Balance Sheet, is net cash & until last year, there was FCF growth. Recurrent CAPEX is low (around 6% of sales) & it is relatively manpower light (around 5,000 employees) which enables it to re-structure more easily to effect a turn-around. (Retrenchment of large number of employees is usually problematic). Not really sure why they increased headcount last year in the midst of a pandemic.
As PRC & HK sales comprise around 60% of MFI's total sales in 2021, I see no sense in the Company closing down production in China, selling the property in the current depressed market & lengthening their supply chain in the midst of pandemic restrictions & global supply chain bottlenecks.
By the way, I am not sure if its true that MFI's decrease in margins is due to raw materials. Cost of inventory (which I take to mean Material Cost of Sales) in 2021 amounted to HK$778m (much higher than HK$649m or around 48% of sales in 2020) & is around 54% of sales. Pre-pandemic, from 2009 to 2019, average Cost of Inventory was 54.8% of sales. Material costs therefore seem to be pretty constant as a percentage of sales. Decreasing gross margins may be due instead to increasing Direct Labour costs & overheads.
(The above is just personal opinion & not to be construed as investment advice or inducement to trade).
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On 1 Apr2022, Ching Chi Fai- Chairman & Founder, increased its stake in Ming Fai by 698k shares to 29.39%.
Is this a signal that the business is turning around?
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