YHI International

[Squirrel]

Hi Mushy and Squirrel

http://infopub.sgx.com/FileOpen/YHI-FY20...eID=505580

Q1 boosted by one off gain.

1)  will this profit be considered for dividend?
2)  is it a concern that the operational profit seems lower than expected?

1) I don't see why it will be excluded. Dividend has always been considered as a percentage of the profit attributable to shareholders.

2) I guess this should be a concern to all investors, but how much of it depends on the investment thesis. It will be a great concern for growth investors but for a value investor, maybe not so much. 

My reasons for buying this company is due to the deep discount to value that the company presents, the current trough that the industry is undergoing and the track record that the company and its management have presented in the past 10+ years (not a year of losses, that's pretty remarkable). From my point of view, I am investing into a company that is facing multiple headwinds over the pass few years. Intense overcapacity in China, EU wide tariffs on tyres, recent aluminium volatility due to RUSAL sanction etc. The company's response has been great so far, rightsizing their production, reducing the receivables through their 3R initiatives, renting out unused property, selling non strategic property in Australia.

I am currently holding onto a company that's trading at $0.455, worth $0.87 on books and $0.94 if you take into account the fair value markup in the Shanghai property. Even if we take the current $2m to be the norm over the next 3 quarters, we still get $11m of PAT for this year and a 4.2% dividend yield at current prices at 50% distribution. All this while waiting for the tide to turn and the company generating over $20m of operating cashflow every year.

I believe this is a waiting period for the worst to pass. Mushy has indicated as well that China is working on the overcapacity issue. As long as the company stays profitable, the discount will just get more and more attractive. Once the headwinds are gone, there will be then a very short period of time for the discount to vanish, and I would want to stay fully vested when that happens, all while being handed 3-4% dividends year on year.

Thanks for your reply!   earlier you had been expecting $14m or more.  Do u still expect that to be achievable or do you think it may be closer to $11m?

bro Squirrel is very accurate.  came in clsoer to $14m than the base case of $11m.  

Thanks, was lucky I guess.

Just happy that the dividend yield is as expected. Happy to continue holding. Just rental income alone is $3.76m. Even if all else goes flat in PL, we are getting recurring of 0.65cents in dividends from the rental (assuming 50% payout) which is 1.5% yield at current prices, just sitting there as a landlord!

[karlmarx]

The price of YHI still looks closer to, rather than further from, fair value.


1) A common reason used to support an argument of why any particular stock is cheap, is because its P/B or P/RNAV is low. The same has been said for YHI. But the question we have to ask ourselves is, why should YHI's (or any stock for that matter) P/B or P/RNAV be trading at closer to 1, compared to where it is currently trading at (~0.48)?

YHI's average ROE for the past 10 years is about 5.1%. Assuming that this is the expected long-term returns of YHI's shareholder, paying a book value of 0.5 -- which is what the market is presently offering -- will mean that the actual return the shareholder can expect is twice of 5.1%, or 10.2%.

Paying a book value of 1 -- which means buying YHI at about twice of current share price -- will mean that the actual return the shareholder can expect is half of 10.2%, or 5.1%.

So unless the future ROE of YHI is expected to be much higher than what it is currently, it is unlikely that YHI's price to move closer to P/B of 1.

This exercise also helps us to answer the privatisation question.


2) Will the Tay family privatise YHI? Possibly, if they have the financial means to do so.

How much will the Tay family pay? Will the price be closer to P/B of 1 where long-term returns may be 5.1%, or closer to P/B of 0.5 where long-term returns may be 10.2%?

Unless, the Tay family is willing to accept long-term returns that are less than 10.2% -- assuming that this is indeed the long-term return -- it is unlikely that they will pay more than current market price.

Probably the only scenario they may privatise is when they expect long-term returns to be much higher that what is presented here. A lot of that will then depend on the business of tyre distribution.


3) From the P/E angle, YHI's average 10-year comprehensive income (which includes forex depreciation) is about $12m. Assuming we value YHI at 10x earnings, we get $120m. The present market price of YHI at 41 cents per share also values the company at $120m.


4) The reason why the book generates lowish 5.1% returns is due to the low GPM, long inventory and receivables turnover, and high payables turnover.

Its average inventory turnover over the past 10 years is 3.9 months, and for receivables turnover, it is 2.2 months. So from buying goods, to selling them, and then receiving payment, it takes YHI about 6.1 months. Meanwhile, their average payable is only 1.3 months. This long cash conversion cycle of 4.8 months limits their ability to increase volume/revenue, even if there is demand for their products, since there will be a limit to the amount of loan they can take to finance the inventories/receivables.

Business that operate on such unattractive cash conversion cycles will naturally demand a higher GPM from their customers to boost their ROA/E. The fact that this has not happened -- and GPM has actually been decreasing -- provides hints on market that YHI is competing in.


5) As much as the YHI says that it is doing much to improve its capital structure, the reality is that there is little that they can do as a distributor. Part of the reason why borrowings and inventories were reduced was because YHI did less business.

$000 Revenue Total Loans Inventory
FY13: 508,923 139,436 131,096
FY14: 511,229 132,880 132,323
FY15: 499,174 126,270 126,299
FY16: 465,569 98,375 112,937
FY17: 442,878 85,376 111,721
FY18: 455,593 83,507 119,992

We can still say that YHI has reduced its borrowings much more than the proportion it has reduced revenue. But to reduce their debt further will mean that they will have to utilise their $50m or so cash, which should be clear by now that it acts as a reserve, which will be important during both a crisis, or a boom.

[Retired@52]

YHI International made Profits and paid Dividends every year for the last 16 years.

Share Price was $0.74 on 23rd April 2012 (Adjusted historical high)
Share Price was $0.26 on 21st Jan 2016 (Adjusted historical low)

Current share price is $0.40
Dividend of $0.0235 (CD to 7th May 2019)

The current yield works out to 5.9%

[specuvestor]

YHI International made Profits and paid Dividends every year for the last 16 years.

Share Price was $0.74 on 23rd April 2012 (Adjusted historical high)
Share Price was $0.26 on 21st Jan 2016 (Adjusted historical low)

Current share price is $0.40
Dividend of $0.0235 (CD to 7th May 2019)

The current yield works out to 5.9%

Just thought I should add that make $1 also considered made profit cause Ive heard this argument many times. Key is consistency.

If my 2cts worth anything, sometimes I suggest to management that it's better to have a 30-70% payout but consistent absolute amount, rather than consistent 50% payout, ceteris paribus excluding consideration for other vested interest. Mr Market values these 2 approaches rather differently.

[karlmarx]

1) The dividend yield of 5.9% is high, yet why does the market not value the shares higher, and lower the yield to say, 4%?

Perhaps the market is not (yet) convinced that the dividends can be maintained at 2.35 cents every year.

After all, the increase of dividends from FY17 to FY18 is entirely due to gains from asset disposals, which will not be recurring. So while this is a good treat for current YHI shareholders, unless business materially improves, or YHI makes another gain from asset disposal, prospective shareholders buying in anticipation of a 5.9% yield should be aware of the situation.


2) YHI has been re-iterating its strategy to reduce receivables and inventory for many many years. But the financial statements speak otherwise. As much as YHI may wish to reduce their working capital, I believe that it is unlikely for them to reduce receivables and inventory in a meaningful way.

YHI may have existing terms with manufacturers to purchase a certain (large) non-negotiable volume, and make payment within a certain (short) period. Since distribution -- whose key value-add is to ensure operational efficiency of both manufacturer and retailer by reducing their working capital requirement of holding finished goods -- is a low tech and low value-add business, YHI's ability to negotiate terms in its favour is probably low.

A new comer only needs to have a $100m of capital, be willing to buy more tyres/wheels from manufacturers than YHI and make payment faster, and offer slightly lower prices to retailers and give them more credit.


3) Nevertheless, this does not mean YHI is a poor investment candidate, or that one cannot make money from buying its shares. After all, someone has to perform the distribution function. So YHI is likely to stay around for the next 10 years or longer, if its past behaviour is representative of its future actions.

[Squirrel]

Interestingly, the company has been undergoing a series of share buybacks since results announcement. The amount bought back is relentless and consistent.

Suffice to say, I do view company share buybacks differently from say, founder or management teams purchasing shares off the market. Lehman was still buying back shares up till pretty near its last days of trading. Of course, YHI is in no way like Lehman. I would think that using cash on its balance sheet to buy back shares is definitely a way of generating value for shareholders.

On another note, personally I think that they are doing shareholders a favor by generating liquidity and allowing them an exit. With the way they are buying back shares, I doubt a privatisation is on the cards (would be much easier to launch a GO at lower prices won't it?).

I have held this for the past 3.5 years, generating consistent dividends of around 5% (depending on traded price at the point in time) and some amount of capital gains. Am letting this go now through the share buy backs. I guess my worries are the disruption of e-commerce and ability of the manufacturers in cutting out the middleman (as evidenced by what happened to American Tire Distributors).

Wishing all shareholders good fortune in holding this counter going forward. The share price does seem to be going up with support from share buybacks!

[dydx]

Interestingly, the company has been undergoing a series of share buybacks since results announcement. The amount bought back is relentless and consistent.

Suffice to say, I do view company share buybacks differently from say, founder or management teams purchasing shares off the market. Lehman was still buying back shares up till pretty near its last days of trading. Of course, YHI is in no way like Lehman. I would think that using cash on its balance sheet to buy back shares is definitely a way of generating value for shareholders.

On another note, personally I think that they are doing shareholders a favor by generating liquidity and allowing them an exit. With the way they are buying back shares, I doubt a privatisation is on the cards (would be much easier to launch a GO at lower prices won't it?).

A company buying back its own shares by paying much lower than its stated NAV/share will serve to immediately raise the NAV/share and future EPS of the remaining shares, thereby making them even more valuable. With NAV/share at $0.9037 as at 30Jun20, YHI - now in a net cash position - buying back its own shares by paying only $0.365/share is definitely the right thing to do.

YHI buying back its own shares is also indirectly helping the controlling shareholders/founder (Tay Family) to raise their interests in the company, and this way is definitely cheaper than if they do so with their own resources and more effectively too, as there are restrictions governing controlling shareholders buying more shares from the open market. I think minority shareholders should start to monitor the impact of the company's share buy-backs on the Tay Family's interests. My own rough calculation shows the share buy-backs (14 transactions so far since 18Aug20) have already raised the Tay Family's combined interests by over 0.4%. Those minorities who sold shares in the open-market recently are likely those not in the know or who need to raise some cash.

[Squirrel]

Interestingly, the company has been undergoing a series of share buybacks since results announcement. The amount bought back is relentless and consistent.

Suffice to say, I do view company share buybacks differently from say, founder or management teams purchasing shares off the market. Lehman was still buying back shares up till pretty near its last days of trading. Of course, YHI is in no way like Lehman. I would think that using cash on its balance sheet to buy back shares is definitely a way of generating value for shareholders.

On another note, personally I think that they are doing shareholders a favor by generating liquidity and allowing them an exit. With the way they are buying back shares, I doubt a privatisation is on the cards (would be much easier to launch a GO at lower prices won't it?).

A company buying back its own shares by paying much lower than its stated NAV/share will serve to immediately raise the NAV/share and future EPS of the remaining shares, thereby making them even more valuable. With NAV/share at $0.9037 as at 30Jun20, YHI - now in a net cash position - buying back its own shares by paying only $0.365/share is definitely the right thing to do.

YHI buying back its own shares is also indirectly helping the controlling shareholders/founder (Tay Family) to raise their interests in the company, and this way is definitely cheaper than if they do so with their own resources and more effectively too, as there are restrictions governing controlling shareholders buying more shares from the open market. I think minority shareholders should start to monitor the impact of the company's share buy-backs on the Tay Family's interests. My own rough calculation shows the share buy-backs (14 transactions so far since 18Aug20) have already raised the Tay Family's combined interests by over 0.4%. Those minorities who sold shares in the open-market recently are likely those not in the know or who need to raise some cash.

 
Woh woh, given that I did sell in the open market recently, I hope you are not insinuating that I am not in the know.

It doesn't really matter how others view it anyway, its just my practice to make clear what I am out of and what I am not in this forum. Not many people does that so just my little quirk.

Exiting this counter honestly, is just because I found something else that I find more attractive to invest in and I am limiting myself to a certain number of companies. That's all. Seems like the share buyback price is going higher. Congrats to long term shareholders!

[dydx]

Woh woh, given that I did sell in the open market recently, I hope you are not insinuating that I am not in the know.

Not at all, "in the know" I simply refer to those who do not read YHI's announcements and therefore may not be aware of the recent many share buyback transactions.

[dreamybear]

Exiting this counter honestly, is just because I found something else that I find more attractive to invest in and I am limiting myself to a certain number of companies.

No reference to YHI, I do think focussing on one's most desirable selected few is a good strategy indeed. Furthermore, there are currently some very good opportunities out there in the market.

Ironically however, a "bargain" economic downturn situation can also bring about other headaches like is it better to invest in good quality blue chip style stocks which will bounce back up (at least theoretically) post-covid or stocks which has a potential to be a good multi-bagger ? For e.g., wld SATS / Comfort DelGro(CDG) be a better investment than say a small under the radar company ABC also trading at cheap valuation but has a realistic chance of significantly increasing its earnings over the next years ?

Buying SATS, CDG and waiting them out for 3 years is almost like a "sure win" bet, barring unforseen circumstances. While they cld double in price, I think a 3-5x bagger may not be likely. On the other hand, a small company ABC may face more uncertanities(not the financials but bizness prospects / mgmt ) since it is controlled/managed by individual founders and not professional CEOs - cld be low ball offer, diversifying to other unrelated bizness, etc. That is one disadvantage we have as retail investors, since we are not able to amass a controlling stake to exert any signficant influence. However, if ABC can eventually become a 10x or 20x multi-bagger, it can potentially be a life changer.

I guess one cld apportion one's investments into "stable recovery" and "high growth/potential" categories, or for the gifted like WB, make exceptional judgement calls. But in a world of limited capital, time, effort, genius talent and needing a minimum invested amount to make an investment really count, it can be trickly indeed. And not forgetting there's also WB's punchcard concept.

Wld appreciate views/guidance from buddies here. Many thanks.