YHI International

[Squirrel]

They did not state any figures during agm. Chairman just say that he personally interviewed a few candidates who eanted to rent that land incl the building. I was thinking why not just get an agent to help rent out. I checked the annual report but there was no record of the size or lease remainding or value of the shanghai plant. This is unlike some other company reports that listed all their properties and details.

If you dig into historical Annual reports you can find the details on the Shanghai Manufacturing plant.

Land area: 47,035m2
Lease: 50 years from 14.06.1999 to 13.06.2049

Extracted from their 2016 AR as follows

"During the financial year ended 31 December 2016, plant and machineries and leasehold property (comprising land and building) of YHIMS of $9,100,000 and $11,600,000 respectively were subjected to impairment test. Indicator of impairment exists for these assets as YHIMS’s production had stopped on 30 December 2016 (Note 31). The recoverable amount of these assets were determined based on fair value less cost to sell.

For the plant and machineries, the fair values were assessed by an independent external valuer using replacement cost method. Under this valuation technique, the valuer applied judgement and estimation in deriving at the replacement cost based on information gathered from the market. The valuer also considered adjustments to the replacement costs to factor in the remaining useful lives of these plant and machineries. For the leasehold property, management made reference to sale prices of comparable plots for its fair value. Management applied judgement on the comparability of those plots and made adjustments on those sale prices for remaining land tenure.
No impairment were required as the fair value less cost to sell for these assets were higher than their book values as at 31 December 2016."

[Mushy]

To add on from what I remember.
Chairman does not want to sell the shanghai land cos he said it is in a very good location, had appreciated and will appreciate some more. I cannot remember if i asked if he is holding on because he thinks there might be chance that YHI will want to setup production in shanghai again. But the general tone of chairman during agm is that manufacturing in china on the whole is getting less lucrative. With the 5 years renewal of the EU dumping tax on wheels exported from china, it is more attractive to manufacture in Malaysia to ship to EU. He was lamenting about how good the severence payout to the laidoff china workers was. In general labour costs in China had risen alot and no longer that advantageous. We saw that in many local listed companies that had plants in China as well.

On the wheel manufacturing business, he said the aftermarket wheels business is the one that is making good profits and propping up the oem wheels. I think the oem wheels is the one that is very difficult to do in China, as a lot of "guanxi" and "xxx" is needed. Chairman said lesson was learnt on this and so he stopped the shanghai plant which was doing more of the oem wheels in china.
On the tyre distributing business, there is alot of excess stocks in the market.

[Squirrel]

YHI results are out. Some headlines as follows

Profit & Losses
- Revenue down mainly on cessation of production at Shanghai factory
- Profit attributable to Equity Holders of the Company is up 6.6% Y-O-Y
- reduction in interest expenses from paying down of loans
- increase in admin expenses which seems to be one time as its "mainly due to retrenchment compensation to workers, depreciation charge reclassed from cost of goods sold to administrative expenses due to cessation of production at our Shanghai factory and higher unrealised foreign exchange translation losses"

Cash Hoard
- Further implementation of the 3R policy has reduced inventories from $112.9m to $99m, receivables were reduced  Q-O-Q as well
- The above in conjunction with other operating activities has added $13.7m to the cash pile, which $5m has been used to pay down loans
- Cash equiv increase from $51m to $57m Q-O-Q, market cap trading at $98m at time of writing
- Loans reduced to $72m

Shanghai Plant
- as per conveyed by Mushy from the AGM, the plant will be rented out from 2H17 onwards as the moves will be completed by end of 1H17
- in relation to Mushy's sharing of the management's view that the land has risen significantly, the change in policies back in 2014 to sell land with only leases of 20 years rather than 50 years likely contributed to that as well, please refer to link for a read (http://www.zgtdxh.org.cn/tdr/wslt/26tdr/...409560.htm)

Seems like management is doing what they can to improve cashflow, we should see improvements in the following quarters with
- rolling off of one time costs (related to cessation of Shanghai plant)
- reducing financing costs (via paying down of loans, likely leaving only the portion related to trade financing that might be an industrial norm)
- rent from the Shanghai plant in 3Q17 onwards

IMHO, the company is moving prudently in the right direction and showing for their record for being consistently profitable.

[Squirrel]

Trying to look deeper into the valuation for the Shanghai Plant and hoping valuebuddies here can help with taking a look and give their thoughts. Here are the points related to the Shanghai Plant

- 47,035 sqm of gross floor area
- plot ratio unknown
- 32 more years of lease expiring in 2049
- Has undergone at least 3 phases of construction
   - Phase 1: 11,293.67 sqm
   - Phase 2: 8,647 sqm
   - Phase 3: floor area disclosed in the financials, for warehousing purposes
- valuation cert in the YHI prospectus has the buildings valued at $4,607,000 (Phase 1 + 2) as of Dec 2002

Then comes the part in the attempt to determine the value of the plant. In the 2016 AR, its stated that the YHIMS is holding the Shanghai plant at $20,700,000 out of which $11,600,000 is the value of the land and buildings. With a straight line depreciation on the buildings, the value can be estimated to be the following breakdown.

Land: $8.65m
Buildings: $2.95m

This is potentially undervaluing the building as Phase 3 is not included in the estimated building value.

As extracted from the Shanghai property transactions site for transactions in Xinzhuang Industrial. These are properties sold by the Shanghai Municipal Planning and Land Resources Administration (name of the dept as translated by Google Translate)

http://www.shtdsc.com/2016/tdjy/jyjg/crjg/[url=http://www.shtdsc.com/2016/tdjy/jyjg/crjg/][/url]

                        Land Area (m2)  Planned Built up(m2) Plot Ratio    Price (RMB)          Per m2   Lease    per m2 per Yr Transaction date
Plot 239                4,746.40               8,401.13               1.77        ¥7,150,000           ¥851       20           ¥42.55      11-May-17
Plot 240                29,287.30             46,859.68             1.6          ¥35,610,000         ¥760       20           ¥38.00      28-Dec-16
Plot 235                7,289.00               14,578.00             2             ¥10,250,000         ¥703       20           ¥35.16      19-Dec-16
Plot 211                6,919.70               12,386.26             1.79        ¥9,150,000           ¥739       20           ¥36.94      01-Nov-16
Plot 223                10,747.50             21,172.58             1.97        ¥12,340,000         ¥583       20           ¥29.14      02-Dec-15
Plot 232                4,700.10               8,413.18               1.79        ¥5,080,000           ¥604       20           ¥30.19      12-Nov-15
Plot 224                19,577.00             23,492.40             1.2          ¥25,120,000         ¥1,069    50           ¥21.39      18-Dec-14
Plot 217                14,112.00             17,075.52             1.21        ¥18,000,000         ¥1,054    50           ¥21.08      18-Dec-14
Plot 225                10,131.00             26,239.29             2.59        ¥16,830,000         ¥641       50           ¥12.83      18-Dec-14
Plot 222                20,676.00             27,499.08             1.33        ¥26,370,000         ¥959       50           ¥19.18      18-Dec-14
Plot 226                20,785.00             41,362.15             1.99        ¥29,310,000         ¥709       50           ¥14.17      18-Dec-14
Plot 227                9,246.00               18,307.08             1.98        ¥13,040,000         ¥712       50           ¥14.25      18-Dec-14
Plot 214                10,132.00             26,343.20             2.6          ¥16,720,000         ¥635       50           ¥12.69      18-Dec-14

As you can see, the more recent plots post 2014 have shorter leases of 20 years compared to earlier ones.

- Mean and median plot ratio of the above is at circa 1.8
- Average per sqm per year of lease is at RMB38.16 for the last 4 transactions (2016 - 2017)

Assumptions under valuing the Shanghai Plant (Land only)
- Taking a conservative plot ratio of 1.5 (planned built up area of 70,522.5 sqm)
- Average transacted price of 38.16 per sqm per year of lease
- Remaining lease of 32 years
- SGDCNY rate of 4.951

The Shanghai plant will be valued at $17.4m, which is roughly $8.75m markup from book value. Not really meaningful if the management thinks that there is more upside and not intending to sell it yet. However it will lend some base to the rental income analysis that is coming up next.

Anything that i have overlooked here? Appreciate any inputs from the forum buddies

[opmi]

Their Xinzhuang plot around by indu, quite far from the nearest resi,

From what I read, Xinzhuang dont have the plan to convert to resi...

my thots only..

[Squirrel]

Their Xinzhuang plot around by indu, quite far from the nearest resi,

From what I read, Xinzhuang dont have the plan to convert to resi...

my thots only..

All the above are transactions for industrial plots. There is nothing related to residential properties in the above post.

[opmi]

Their Xinzhuang plot around by indu, quite far from the nearest resi,

From what I read, Xinzhuang dont have the plan to convert to resi...

my thots only..

All the above are transactions for industrial plots. There is nothing related to residential properties in the above post.

Yes. the big windfall will come IF there is resi conversion. since there is no chance now for resi conversion, I passed.

[Squirrel]

Their Xinzhuang plot around by indu, quite far from the nearest resi,

From what I read, Xinzhuang dont have the plan to convert to resi...

my thots only..

All the above are transactions for industrial plots. There is nothing related to residential properties in the above post.

Yes. the big windfall will come IF there is resi conversion. since there is no chance now for resi conversion, I passed.

I don't think there ever will be a chance for residential conversion. The market value of the plot versus the book value held presents a material upside as per calculations above. If the company ever decides to develop any residential property for any reason, I would clear out of the counter pretty soon. Don't really like companies "diversifying" into areas not of their expertise.

[Squirrel]

,Went looking into the financials again in an attempt to try to understand more of what is happening at the firm and answer some questions that I have myself

Revenues has been on the decline for years, how long will it continue?
The answer is probably, I don't know either. It is likely that revenue will continue to dip overall this year due to the cessation of production at the Shanghai Plant. Looking at the distribution revenue alone, it is encouraging to see that Q12017 distribution revenues was up 6.4% year on year from $76.5m to $81.4m. Q416 distribution revenues was up 7.2% year on year from $77.7m to $83.3m. These are the first two quarters in a while that have seen an increase in distribution revenues. Would that suggest a bottom? The mix in the distribution revenue has been steadily shifting over the past few years as well.

Rev by Distribution    2013       2014      2015       2016
Tyres                         72.0%    71.0%    67.0%    61.4%
Industrial Power         19.0%    20.0%    21.0%    23.3%
Wheels                       9.0%     9.0%      12.0%    15.3%

How beneficial is the move to consolidate Shanghai production at Suzhou?
In order to proxy this benefit, we have to look towards what has happened in recent history in the company. It has been highlighted in the 2016 AR that "Our wheel manufacturing facility in Malacca was the best performing for the Group in FY2016". Referencing the annual reports, segment results for manufacturing in ASEAN (the Malacca plant is the only one in ASEAN recorded in their books) are as follows.

ASEAN
$(2,014) => $536 => $3,915 from 2014 to 2016.

North East Asia (China + Taiwan)
$(4,670) => $925 => $(4,522) from 2014 to 2016

2013 does not break down the results by region but overall manufacturing results was $(8,616). It seems like the Sepang move that was completed in 2015 did lots of good to improve profits. With the past experience, hopefully the management would be able to repeat the feat. And further more, any recovery would be dollar for dollar since its effectively less losses and won't impact taxation. From the $(4,522) in losses in 2016, there is lots of room to improve on.

How much would rental income be expected to rake in for the Shanghai plant?
I have looked across multiple platforms and data sources to try to nail down a figure, but multiple methods results in very disparate estimates. A 5% yield on the property seems to be a rather conservative figure that we could look at which would yield about $1m a year, or $500k in 2017.

[Squirrel]

Stamford Tyres released results today with improving gross margin and tripling of profits. Would this be a good indication of a turn in the industry?

Stamford Tyre Net profit more than trebles

To be fair, YHI's business has been improving but it has been masked by one time costs in the project to consolidate Shanghai plant into Suzhou. We should be able to get better insight with YHI's next quarter's reporting.