YHI International

[dydx]

YHI's disposal of the group's excess factory land and buildings located in Negeri Sembilan, Malaysia, to Mission Foods Malaysia S/B for RM30.5m in cash (first announced on 1Sep14) has been completed.....
http://infopub.sgx.com/FileOpen/YHI-Ann-...eID=369137 [9Sep15 announcement]
http://infopub.sgx.com/FileOpen/YHI-Fact...eID=313151 [1Sep14 announcement]

We can reasonably expect YHI to apply the MYR funds to repay/reduce the group's on-shore MYR liabilities and to support working capital in Malaysia.

[dydx]

3Q result first released on 12Nov15.....
http://infopub.sgx.com/FileOpen/YHI-FY20...eID=377827

Operating businesses are suffering but B/S has improved gradually.

[Squirrel]

The annual report for YHI has been published. It looks undervalued but not sure why prices are so depressed. Hoping to run some analysis here, and perhaps get some views on this counter.

Fundamentals as of 10 Apr 2017
Stock Price: $0.33
Market Cap: $96.5m
NAV: $256m, P/B: 0.38
NCAV: $150m, P/NCAV: 0.64
Operating CF before working cap changes: +$24m

Trend in the past 5 years
YHI International Limited is a distributor of automotive and industrial products and an ODM in alloy wheels manufacturing. In the last five years (2012 to 2016), the company has registered a downtrend in revenues ($541m to $465m), Net profit margin (3.9% to 1%) and EPS (6.26cts to 1.26cts). Distribution makes up 70% of revenue. In past years, the company has consistently given out dividends with the payout ratio increasing from 40% to 50% of earnings.

Recent developments
The firm has completed the sale of the Sepang plant in 2015 and manufacturing was consolidated into the plant in Malacca. In China they have also moved their precision moulding operations from Shanghai to Suzhou in 2016. Following on the restructuring success in Malaysia (Best performing since consolidation), the company has commenced on consolidating Shanghai manufacturing operations to Suzhou in 2017. Following this restructuring, the company would have manufacturing facilities in Taoyuan (Taiwan), Malacca (Malaysia) and Suzhou (China).

Investment Thesis

Book value (2016)
The company looks grossly undervalued from an assets point of view. Out of $96.5m in market cap, $51.5m is held in cash and equivalents. There would be concern that $113m is held in inventories and $95m is held in receivables. A quick check with Stamford Tyres would show that this ratio is reasonable given the level of revenues generated.

Book value (2017)
The Shanghai Factory (47,000m2) was purchased at circa $10m in 1999, current depreciated value would be around $6.5m on the books (straight line 50 year leasehold). Looking at transactions around the region, the land could be worth $10m at current prices. Given their past history of selling the Sepang plant, they might do the same for the Shanghai manufacturing plant. This does not yet take into account the Shanghai moulding plant (12,000m2 from 2004) that has been vacated. This could add $10m to cash, $3.5m to profits.

Cashflow from operations stands at $24m while changes in working capital add on another $24m from their initiative of reducing receivables and inventories that they are focusing on. From this cashflow, they paid down borrowings by $29m in 2016. This reduced interest expense by $1m.

Cashflow generation would be expected to be around $24m + $6m (assuming from 3R initiative) + $10m (Shanghai Property) = $40m. This can be used to further pay down borrowings as per what they have done in 2016 (circa 5% interest).

Turnaround in operations (in 2016)
On first glance, this company is not attractive at all based on the downward trending revenues and profits. However, if you take out nonrecurring items in the profits (Sepang plant gains in 2015 and retrenchment compensation provision in 2016), the company has actually registered a 23.6% increase in net profit in 2016.

Turnaround in (2017)
From the base of $3.7m in 2016, the following are estimated.

+$3.1m, by removing nonrecurring retrenchment expense in 2016
+$3.1m, by assuming that retrenchment benefits are for 6 months’ salary and the consolidated factory would need to hire half the amount of new workers compared to the old plant
+$1m, by reduction in finance expense through paring down of borrowings
+$3.5m, sale of 47,000m2 plant in Shanghai

= +$12.6 (assuming 17% tax rate)

In all, the net cash P/E ratio would be 3.56 times. If dividend stays at 50% level, that would translate to a 6.5% dividend yield. And all these backed by a P/B of 0.38. It seems that there is a pretty big value buffer here. And all the above does not take into account the company downsizing to the right scale. Back in 2008 when they were running the similar level of revenue, they could eke out a net profit margin of 4.6%.

Appreciate if there are any comments, not sure whether i missed/misinterpreted anything here.

[karlmarx]

The poor share price is perhaps due to the poor economics of the tyre distribution business presently.

1) A low return on equity: 1.4% ($3.7m profit from a capital of $256m).

2) Tiny profit margins: 0.8% ($3.7m profit from a revenue of $465m).

3) Rising interest rates will mean higher financing expense on its $100m of debt.

Even at a p/b of 0.38, the return on your invested capital is only 3.68%. Unless the business conditions improve (oversupply of tyre, low demand from end users), the share price will remain at present levels.

Nevertheless, YHI is making the prudent move of reducing capacity and debt.

Stamford Tyres is valued slightly higher as it has a proportion of its business in the provision of retail services (workshops for tyre and battery change), which adds more value (in terms of margins) compared to distribution.

[Squirrel]

Thanks for the comments above, now I can start seeing where the remaining investors are coming from.

With respect to point 1) and 2), your basis of using $3.7m is not right imho. The one time items are not stripped out of this ($3.1m retrenchment provisions), and future cost savings are not taken into account. This doesn't mean that the projected profits mentioned above will give it a superb return but that is the nature of distribution business.

As for Point 3), 60% to 80% of the borrowings are at fixed rates, so not too big an issue here. With the available cashflow, the company is likely to pay down borrowings and making this even less relevant.

It seems like there are many ways that value can be extracted from the company which can be in the form of 1) special dividend on $51.5m cash 2) takeover of the firm by major shareholder already holding 63% of the firm (including cashflow for 2017, the transaction by majority owner can be effectively cashless by getting a bridge facility and then paying themselves dividends post acquisition.

In short it seems like a chance to buy a business that is profit making at $0.38 cents to a dollar.

Vested and looking to add depending on opinions that are voiced out. Caveat Emptor and do your own due diligence please.

[Rr_1]

Thanks for the comments above, now I can start seeing where the remaining investors are coming from.

With respect to point 1) and 2), your basis of using $3.7m is not right imho. The one time items are not stripped out of this ($3.1m retrenchment provisions), and future cost savings are not taken into account. This doesn't mean that the projected profits mentioned above will give it a superb return but that is the nature of distribution business.

As for Point 3), 60% to 80% of the borrowings are at fixed rates, so not too big an issue here. With the available cashflow, the company is likely to pay down borrowings and making this even less relevant.

It seems like there are many ways that value can be extracted from the company which can be in the form of 1) special dividend on $51.5m cash 2) takeover of the firm by major shareholder already holding 63% of the firm (including cashflow for 2017, the transaction by majority owner can be effectively cashless by getting a bridge facility and then paying themselves dividends post acquisition.

In short it seems like a chance to buy a business that is profit making at $0.38 cents to a dollar.

Vested and looking to add depending on opinions that are voiced out. Caveat Emptor and do your own due diligence please.

Hello Squirrel, 

First off, nice analysis   . It would seem that any appreciation of share price would be a result of, as you mention, paying a special dividend or a takeover play. I would think this is highly dependent on management's intention and capabilities. Attending the AGM should be helpful in this regard. Operational-wise, it is encouraging that the company is engaging in restructuring to manage cost. From its financial report, net profit, excluding one off occurrences, rose from 5.5m in FY2015 to 6.8m in FY2016. This would indicate that management's cost cutting measures are effective and the declining trend of revenue can somewhat be mitigated. I'm still in the midst of studying its financials and reports but it does indeed seem a bargain. Let us just hope it doesn't become a value trap.(possible risk to note!)

Ray

[Squirrel]

Thanks for the comments above, now I can start seeing where the remaining investors are coming from.

With respect to point 1) and 2), your basis of using $3.7m is not right imho. The one time items are not stripped out of this ($3.1m retrenchment provisions), and future cost savings are not taken into account. This doesn't mean that the projected profits mentioned above will give it a superb return but that is the nature of distribution business.

As for Point 3), 60% to 80% of the borrowings are at fixed rates, so not too big an issue here. With the available cashflow, the company is likely to pay down borrowings and making this even less relevant.

It seems like there are many ways that value can be extracted from the company which can be in the form of 1) special dividend on $51.5m cash 2) takeover of the firm by major shareholder already holding 63% of the firm (including cashflow for 2017, the transaction by majority owner can be effectively cashless by getting a bridge facility and then paying themselves dividends post acquisition.

In short it seems like a chance to buy a business that is profit making at $0.38 cents to a dollar.

Vested and looking to add depending on opinions that are voiced out. Caveat Emptor and do your own due diligence please.

Hello Squirrel, 

First off, nice analysis   . It would seem that any appreciation of share price would be a result of, as you mention, paying a special dividend or a takeover play. I would think this is highly dependent on management's intention and capabilities. Attending the AGM should be helpful in this regard. Operational-wise, it is encouraging that the company is engaging in restructuring to manage cost. From its financial report, net profit, excluding one off occurrences, rose from 5.5m in FY2015 to 6.8m in FY2016. This would indicate that management's cost cutting measures are effective and the declining trend of revenue can somewhat be mitigated. I'm still in the midst of studying its financials and reports but it does indeed seem a bargain. Let us just hope it doesn't become a value trap.(possible risk to note!)

Ray

Thanks for the compliment Ray.

What's interesting to note is that since the earliest financials that can be sourced since listing in 2003, the company has been making profits every year. Dividends is given out to shareholders as well every year since 2003. NAV has steadily accumulated and gone up from $88.7m in 2003 to the current $256m while market cap has dropped from a peak of $335m to the current $96.5m. It looks like a company that has fallen out of favor, and poised for a turnaround with right sizing of their businesses.

Dug deeper into what happened for the 12,000m2 Shanghai plant (moulding operations that was consolidated into the Suzhou plant). It seems like the plant was on a rental lease and not a leasehold property, hence there was savings in rental costs in 2016.

The 47,000m2 Shanghai plant (Land + building) is carried at $11.6m on their books and no impairment was required on the leasehold property. Management has indicated that there is no future plans for the plant at the moment. There is potential for bumper cashflow, lower depreciation and repayment of borrowings/special dividends.

[specuvestor]

Before jumping to special dividend, why is the regular dividend halved? maintaining $4m dividend should not be a strain

That leads to: Would you pay out $51.5m cash if you are management with $76.9m ST Debt?

It is a net debt company not net cash so it is even more inappropriate to look at net cash PE, in addition to the fact that I don't believe in netting out anything from a structure, unless you can control the structure

My 2cts

[Squirrel]

Before jumping to special dividend, why is the regular dividend halved? maintaining $4m dividend should not be a strain

That leads to: Would you pay out $51.5m cash if you are management with $76.9m ST Debt?

It is a net debt company not net cash so it is even more inappropriate to look at net cash PE, in addition to the fact that I don't believe in netting out anything from a structure, unless you can control the structure

My 2cts

Thanks for your inputs specuvestor, I love a discussion like this.

I believe regular dividend was halved because profit was halved. From their financial statements, they have always presented dividend as a percentage of earnings which in this year halved from 2015. Hence I believe management sees dividend as a percentage handout from earnings which imho is prudent.

If I am management, and I believe that the assets on my balance sheet and are real and my business is sound, I would prioritize my options as follows.

1) launch a takeover with personal resources/bridge facility and replenish my pockets post acquisition with a dividend payout from the cash pile
2) pay down debt and reduce financing cost and work towards zero liability
3) reward loyal shareholders with a special dividend. I myself hold 63% of the firm after all and the special dividend would give share price a nice nudge

That would be my choice sequence but I am not the management here. 

Lastly, I agree with your arguements on net cash PE. Maybe shouldn't look at it that way. But it just rings similar to what happened with Auric Pacific. The company cut off money losing ventures, restructured the business and was accumulating cash at an alarming rate. I had the same conclusion as the 3 options above for AP, and eventually 1) happened. AP had $90m cash before being taken private at $207m.

[karlmarx]

Distributors essentially operate as traders as their job is to buy from manufacturers and sell to retailers. To be able to not only meet the demands for products from retailers, but also offer them competitive pricing, the distributor will have to purchase their supplies in bulk. To be able to finance bulk purchases, distributors need a large amount of cash/credit.

From the latest quarterly, YHI borrows an estimated $100m to finance an estimated $100m of inventories which is sold over a period of a quarter and then expects to receive an estimated $100m of receivables from the sales. From its quarterly sales, YHI is exposed to $100m of credit risk from customers , $100m of inventory obsolescence risk, and $100m of refinancing risk from its own borrowing. Of course, the probability of these risks materializing is not high, but if it does it could be damaging.

For YHI to eliminate this $100m of debt, while maintaining the same volume of business, it has to raise $100m of cash as working capital. It can do this through a rights issue or earn $100m in the subsequent years. Cost of capital is too expensive to issue rights at current prices, and earning $100m over the next few years seems to be a tall order. So it seems the use of debt will remain for now, until the cost of doing so becomes prohibitive vis-a-vis the tyre market's ability to accept price increases.

Given the business model and risks faced by YHI, how will they view this $50m of cash which makes up only 20% of their book value? What if their customers are taking even longer to pay? What if there is a tightening of credit from banks? Or what if they wish to grow their sales volume, but the banks won't grant them extra credit? I see this $50m cash that the company holds as its own margin of safety.

It is possible, but I do not think it will be prudent for YHI to return the cash to shareholders.

As for takeovers, indeed this is possible, and more so with a low share price. But the same can be said for many other companies, so I won't count on it.