Cheung Woh Technologies

[dydx]

I suppose there are always people out there who would just bet short-term on the news element of the recently released strong FY11 results, either before or after the announcement, hoping for a quick profit from a rise in the share price, and without the intention or ability to take up their purchase contracts. Usually these people will just choose to cut loss when the share price falls instead of rising.

Apart from the positive analyst reports released so far, there are 3 known positive catalyst events going forward which would support Cheung Woh's share price:
(1) the coming release of the FY11 AR;
(2) the coming AGM; and
(3) the coming payment of the proposed $0.01/share Final dividend for FY11.

[dydx]

Cheung Woh's FY11 (ended 31Mar11) AR makes interesting reading....
http://cheungwoh.listedcompany.com/misc/ar2011.pdf

Reading KY Law's Chairman Statement gives me a strong feeling that the man is quite an entrepreneur and expert in the manufacture of precision metal components. Cheung Woh is selectively spending on capex in FY12 to increase production capacity further in order to meet increasing orders and new product programmes from customers. FY12 certainly looks like another year of business growth for Cheung Woh.

[redcorolla95]

Pluses:
Company has been investing in quite heavily in PPE & Working Cap to drive sales
Rising gross & net margins
Rising book value over the last 10 years
Large insider ownership
=> Management looks likely committed to the long term future of the company

Minuses:
Very High receivables
from 2005 to 2011, accounts receivables grew from 19 to 45% of sales; in other words it takes about 160 days for them to be paid back.
In fact, more than 100% increase in book value (S$60 to S$94m) is driven by this increase (S$14 - 73m)
While customers like Wuling, Geely, Chery, BYD etc are likely to grow over the long term with China, the customers have a whole lot more market power and are going to be able to delay payments, so it doesn't look like receivables will drop anytime soon.

With the net income of $21m, we have Cashflow from operations of $14m (which has not been growing exponentially over the last 4 years either), with maintenance capex of $5 - 10m, the FCF is a whole lot lower.

Together with the net debt of $30m,
(i) the company is not trading at 5x owner earnings / FCF
(ii) the real return on capital is much closer to the cost of capital, and so the value of the company should be much closer to book value, or the current share price.

[dydx]

I guess we should look at Cheung Woh's high year-end Trade Receivables balance of $52.685m (as at 28Feb11) - equivalent to 34.8%, or approx. 4.2 months' worth, of FY11's revenue of$151.406m - in the light of the following:
(a) In H2, Cheung Woh's reveune experienced a sharp 22.8% hoh increase to $83.45m (vs. H1's revenue of $67.956m).
(b) Based on the details in Note 9 (in p62/63 of the AR), the large $10.0m yoy increase in Trade Receivables balance at group level was solely attributed to receivables denominated in RMB. We can logically deduce this to Cheung Woh's PRC-based Automotive Components business segment, which in FY11 recorded a huge 55.8% yoy increase in revenue to $62.473m (see Note 31 in p78 of the AR). A relevant question: Are PRC's local-owned car manufacturers good-enough in credit standing/quality to justify granting them short-term trade-related credit of say up to 6 months? A reasonable answer should be "Yes", as E&Y - Cheung Woh's external auditor - is apparently happy to accept this situation and has signed off Cheung Woh's latest financial statement without any qualification.

In FY11, Cheung Woh increased its NP by 28.8% yoy to a new record $17.415m - equivalent to an EPS of $0.0556 (based on the 313.085m issued shares as at 28Feb11). As at 28Feb11, Cheung Woh's NAV/share stood at $0.2995.

If we assume Cheung Woh to have a higher NP in FY12 and raise its EPS to say $0.06, an investment in this counter based on the last done share price of $0.27 is expected to derive (1) $0.06 in earnings from the projected EPS for FY12, from which Cheung Woh may pay out $0.015/share in dividends (using FY11 as a basis); and (2) the coming $0.01/share Final dividend for FY11. The theoratical total return of $0.07 (adding (1) and (2) above) gives a rate of return of 25.9% for an approx. 12-month perspective. Not bad a return, I thought, bearing in mind Cheung Woh's NAV/share would have risen to close to $0.35 by 29Feb12, giving pretty good asset coverage/protection along the way. Or is my computation incorrect and too optimistic?

[redcorolla95]

As a percentage of sales, receivables have been rising every year since FY 2006.
19%, 35%, 31%, 35%, 43%, 45%.
So this is not a one-off issue.

Yes, companies like Chery are big and expanding, but they would probably (i) drag their payments, and / or (ii) ask for discounts for immediate payment. This situation by the way is quite common in industries such as automotive parts: Ford & GM do this to their suppliers - check out the sad story of their largest vendors Delphi & Visteon, electronics: Dell, Foxconn & Samsung do this to their suppliers, Walmart to their vendors, and also in the offshore & marine industry.

If the past 5 years are a guide, Cheung Woh will sell more to their customers, but their customers will continue to take a long time to pay them, and the receivables will continue to be on the balance sheet. Unfortunately, they're not special enough to do the same thing to their suppliers - payables is a much smaller proportion of revenues. E&Y by the way was also the auditor of Lehman brothers.

This is why free cash flow matters more than accrual earnings: operating earnings less increases in working capital; and so companies that can grow without inventories & receivables are great, better still if they can keep dragging payments for their vendors.

So a target price of book value $0.29-$0.35 is a whole lot more reasonable than the SIAS target of $0.60. I have 2 things to note re the computation:
1. all the earnings by definition will end up either as dividends, buybacks, or increases to book value. So if you have $0.06 eps and $0.015 dividends, then book value can only increase by $0.045; otherwise you're double-counting.
2. counting on a 1 yr horizon for the share price to converge to intrinsic value is very optimistic; stocks can certainly be severely mis-priced for longer periods like during bubbles and their associated corrections. Ben Graham recommends 2 yrs and a 1/3 margin of safety.

[sgmystique]

Well dydx, apparently the market does feel your computations to be too optimistic. Cheung Woh is now available at S$0.255 and the price has been dropping regularly. This is inspite of management being quiet confident of a better performance for 2012 as stated in their FY results announcement.

This means that we have a fabulous buying opportunity or management is taking shareholders for a ride. Only time will tell...

I guess we should look at Cheung Woh's high year-end Trade Receivables balance of $52.685m (as at 28Feb11) - equivalent to 34.8%, or approx. 4.2 months' worth, of FY11's revenue of$151.406m - in the light of the following:
(a) In H2, Cheung Woh's reveune experienced a sharp 22.8% hoh increase to $83.45m (vs. H1's revenue of $67.956m).
(b) Based on the details in Note 9 (in p62/63 of the AR), the large $10.0m yoy increase in Trade Receivables balance at group level was solely attributed to receivables denominated in RMB. We can logically deduce this to Cheung Woh's PRC-based Automotive Components business segment, which in FY11 recorded a huge 55.8% yoy increase in revenue to $62.473m (see Note 31 in p78 of the AR). A relevant question: Are PRC's local-owned car manufacturers good-enough in credit standing/quality to justify granting them short-term trade-related credit of say up to 6 months? A reasonable answer should be "Yes", as E&Y - Cheung Woh's external auditor - is apparently happy to accept this situation and has signed off Cheung Woh's latest financial statement without any qualification.

In FY11, Cheung Woh increased its NP by 28.8% yoy to a new record $17.415m - equivalent to an EPS of $0.0556 (based on the 313.085m issued shares as at 28Feb11). As at 28Feb11, Cheung Woh's NAV/share stood at $0.2995.

If we assume Cheung Woh to have a higher NP in FY12 and raise its EPS to say $0.06, an investment in this counter based on the last done share price of $0.27 is expected to derive (1) $0.06 in earnings from the projected EPS for FY12, from which Cheung Woh may pay out $0.015/share in dividends (using FY11 as a basis); and (2) the coming $0.01/share Final dividend for FY11. The theoratical total return of $0.07 (adding (1) and (2) above) gives a rate of return of 25.9% for an approx. 12-month perspective. Not bad a return, I thought, bearing in mind Cheung Woh's NAV/share would have risen to close to $0.35 by 29Feb12, giving pretty good asset coverage/protection along the way. Or is my computation incorrect and too optimistic?

[dydx]

When the overall market weakens in the short-term - like what has happened in the last few weeks - some shareholders may choose to turn sellers, and some may need to raise some cash for various reasons. What can other investors do? I suppose they can either take advantage of the falling or fallen prices to buy more shares, or just do nothing and hope for a better market or higher stock prices to come soon or later.

In the short-term, the market is always a voting machine; but in the longer-term, it is usually quite a good weighing machine. I suppose investors just have to choose a stock well and take a view on the underlying business.

[sgmystique]

I do agree with you. Will be attending the AGM today. Do let me know if there are any specific questions you would like me to ask management.

When the overall market weakens in the short-term - like what has happened in the last few weeks - some shareholders may choose to turn sellers, and some may need to raise some cash for various reasons. What can other investors do? I suppose they can either take advantage of the falling or fallen prices to buy more shares, or just do nothing and hope for a better market or higher stock prices to come soon or later.

In the short-term, the market is always a voting machine; but in the longer-term, it is usually quite a good weighing machine. I suppose investors just have to choose a stock well and take a view on the underlying business.

[sgmystique]

I had been to the AGM of Cheung Woh Technologies today. Had decent interactions with Mr. Law Kung Ying (Executive Chairman). He is quiet confident of Cheung Woh's performance in the months and years ahead. The Japanese earthquake/ tsunami will also not be a very great show stopper for them.

Cheung Woh is starting quarterly reporting from FY2012 and their Q1 report should be out around the 12th July. We passed a Share Repurchase mandate at the EGM. Mr. Law is aware of the poor performance of Cheung Woh shares in the market and he feels that a share repurchase exercise should definitely help in uplifting the valuation of the company. I hope so too ( :

The other notable finding was that Mr. Law, his siblings and mother own 72.09% of the company. They have never sold a single share since the company was listed. This does give me confidence that the firm is in good hands. They had increased their dividend payout by 20% in 2011 and the trend can be expected to continue.

Would appreciate comments from fellow forumers who had been to the AGM.

[dydx]

Cheung Woh will go 'XD' tomorrow for the $0.01/share Final dividend for FY11. Bearing in mind we have about 12 days to the release of the Q1-FY12 results - will it show further imrpovement? - will the share price correct by more than $0.01?