YHI International

[Squirrel]

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.

This is good! Let me try to look at these issues from my limited knowledge.

$100m of credit risk from customers - if you look at the latest AR, the trade receivables are broken down into a minimum of 12 countries (1 category being "Other Countries"), with the largest single country being China at circa 23%. Each country being made up of more individual clients. The AR mentions 100 countries with 31 subsidiaries. I can't imagine a more diversified credit risk profile.

$100m of inventory obsolence risk - Honestly I don't know how to resolve this risk, and I don't know of how individual companies can actually effectively resolve this except through management capabilities. This is inherent in any distributor business i suppose, and we can only trust the honesty of the firm in determining the net realisable value. If anyone could advise that would be great.

$100m of refinancing risk - $70m of this comes from trade financing made up of trust receipt loans and short term bank financing. Remaining from long term loans. Not sure why you think that "earning $100m over the next few years seems to be a tall order". In 2016 itself, they have generated enough cash to reduce borrowings from $126m to $98m on their balance sheet. Consistently they have generated more than $25m in operating cashflow for the past 6 years at least (I didn't go back further than that it just kept going higher and higher with better results in the past). Barring the $20m in trust receipt loans which i believe is industrial practice with letter of credits etc, the remaining $78m could be paid down in 2 years with cash and incoming cashflow (operating cashflow + proceeds from Shanghai plant sale if it happens + cash from their 3R initiative). And they can always go for invoice financing if they need new forms of financing.

I do agree that the $50m might be viewed as a margin of safety given that's the level of cash that the company has been holding over the past few years. What's interesting is what they would do with incoming cashflow in the next few years from the 3 points mentioned above. The past few years have shown that they are willing to pay down borrowings and reduce finance costs, which improves results.

Lastly, for takeovers. Indeed there are many companies out there that are potential takeover targets. But how many of these companies comes with, 0.38 P/B ratio, 0.64 P/NCAV ratio, potential turnaround story, record of 13 profitable years, 50% dividend payout on earnings? It gives me a feeling of a huge value buffer that i can count on while i wait for it to happen, or anything else to unlock shareholder value. As Warren Buffet says... Rule No 1. Never lose money.

Please keep it coming! These discussions are helping in analysing the company further!

[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

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.

Hi Squirrel

Think you probably "half understood" my drift when I rhetorically asked why their dividend halved

I'm saying if they won't pay $4m in dividend it is unlikely they will pay $51.5m cash

In fact if they are looking to privatise, then it is better to do an MBO with mezzanine financing and control 100% cashflow than to pay out cash which the owner will receive only 63%. AP omitted dividend in 2016 even as the CEO buy shares.

That aside, AP had almost no debt. So I guess it is down to whether their earnings will turn around to have some semblance.

[touzi]

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.

On page 93 and 94 of the AR 2016 it seems that besides an inventory of $112M, "the cost of inventories recognised as an expense and included in “cost of sales” amounted to $333,637,000 (2015:$358,729,000).The Group has written down inventories amounting to $1,996,000 (2015: $1,682,000) and the amount has been
included in “cost of sales”." Does that mean that the inventory is a lot higher? Hope somebody can advise. Thanks.

[karlmarx]

The inventory, at any one time, is about $100m.

The cost of inventories amounted to $333m because it accounts for all the tires purchased for FY16.

So the time it takes for them to turn over their inventory is about 3-4 months.

[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.

Hi Squirrel

Think you probably "half understood" my drift when I rhetorically asked why their dividend halved

I'm saying if they won't pay $4m in dividend it is unlikely they will pay $51.5m cash

In fact if they are looking to privatise, then it is better to do an MBO with mezzanine financing and control 100% cashflow than to pay out cash which the owner will receive only 63%. AP omitted dividend in 2016 even as the CEO buy shares.

That aside, AP had almost no debt. So I guess it is down to whether their earnings will turn around to have some semblance.

Hi Specuvestor,

And my intention in the reply was that, the management has always viewed dividends as a percentage of earnings. And since earnings have halved, it is perfectly normal for the dividend to half and stay in line rather than maintaining the $4m dividend and have an outlier of a 100% of earnings distributed. They are pretty consistent in what they do and represent in the management of the company.

And when you say,

In fact if they are looking to privatise, then it is better to do an MBO with mezzanine financing and control 100% cashflow than to pay out cash which the owner will receive only 63%. AP omitted dividend in 2016 even as the CEO buy shares.

I totally agree, which is why listed in the option 1 is the scenario that they takeover and then they pay dividends. Scenario 3 is just paying a one time special dividend. These are separate scenarios in 1) and 3) noted above. Not sure whether you thought the scenarios listed are actually steps in a single scenario but that is not the intention.

What I am thinking as part of my investment thesis is not exactly limited to how well their earnings will turn around (although a turnaround contributes to a large part of it). It is also a function of how much cash they would be able to generate next year that could pare down their $78m borrowing. And this could come from their leasehold land in Shanghai and their continuous efforts under their 3R initiative, on top of their year to year operating cash flow that they are generating.

Suffice to say, I am still looking for a reason not to overweight this in my portfolio as an undervalued gem. This has all been very good discussions. Thanks. And as usual... please do your own due diligence!

[Mushy]

This is my first post, after following this forum for many years.

Some comments as well as observations from recent agm.

I am a YHI shareholder for around 4 years. As a car enthusiast, I can relate to the company's products. They do carry some good brands that are popular globally. And they also make wheels (OEM and ODM) for some globally known names.
The industry is cyclical and I am not talking about the local market with its 10-year COE system. I think it is commendable that during the bad years they still make profits (unlike competitor) and actively trim their fats (inventory, debts, receivables, etc).

During the recent AGM, chairman was confident that the market should be better as early as 2018. Company-wise, they had stopped production at shanghai, moved the production to the other plants and are renting out the place to some logistic company. Chairman said that piece of land had risen alot in value since they acquired it. This consolidation should see better cashflows due to costcut and also rental income. The severance pay had already been accounted.

It was discussed earlier about the possibility of the Tay family or other parties buying out the company and taking it private. One thing that the chairman said during agm struck me. He lamented that it was very hard to do business in China as the proper way of conduct may not always be successful. As a listed company they have to conduct business the proper way. Was he thinking of taking the company private so that he can be more agile? My personal feel base on my experience and understanding of the company and the 2 brothers is that I don't think they will take it private. I have no idea if another party may come in though. I find YHI and the situation very similar to another local listed company that was recently acquired -- HTL. HTL has very similar history, fortunes and shareholding structure like YHI. They were doing the same thing during the downturn of their industry. The first sign of turning around was the price of leather hide dropping. I never expected the Phua bros to take HTL off. They only agreed to sell to China when a very good offer was made, almost 2x NAV. (The side story is that I never really found out why/how/what the china company yihua acquired HTL for when they seem to disappear after paying out, along with their website).

I think the Tays will continue as it is. Richard was always mentioning about his son being in the company and being shown the ropes during the agms. I believe he is being groomed to take over.

[zz...]

Yihua the company still listed and website still around with parent company website too
http://www.yihualife.com/index.php/Home/...ion?part=1
http://www.yihua.com/

[Mushy]

Thanks for update. I did not realise the website is now up and newly revamped. Yihua.com was the website I monitored during the whole year when the interest was first made known till money was paid. I was reading all the reports they published as a listed company in China in chinese. Then I think around the time just before it was concluded, there was no more updates at all and the website was down for many months. Plus the background of the company and its main boss does not appear very clean to me. It was only through talking to HTL mgmt that I was assured they have the money to buy HTL. I attended HTL agms every year and to my shock, the attendence was the lowest last year when there was a declared $1 offer (still need to clear a few regulatory hurdles) and the share price was like 20-30% discount.

[Squirrel]

This is my first post, after following this forum for many years.

Some comments as well as observations from recent agm.

I am a YHI shareholder for around 4 years. As a car enthusiast, I can relate to the company's products. They do carry some good brands that are popular globally. And they also make wheels (OEM and ODM) for some globally known names.
The industry is cyclical and I am not talking about the local market with its 10-year COE system. I think it is commendable that during the bad years they still make profits (unlike competitor) and actively trim their fats (inventory, debts, receivables, etc).

During the recent AGM, chairman was confident that the market should be better as early as 2018. Company-wise, they had stopped production at shanghai, moved the production to the other plants and are renting out the place to some logistic company. Chairman said that piece of land had risen alot in value since they acquired it. This consolidation should see better cashflows due to costcut and also rental income. The severance pay had already been accounted.

It was discussed earlier about the possibility of the Tay family or other parties buying out the company and taking it private. One thing that the chairman said during agm struck me. He lamented that it was very hard to do business in China as the proper way of conduct may not always be successful. As a listed company they have to conduct business the proper way. Was he thinking of taking the company private so that he can be more agile? My personal feel base on my experience and understanding of the company and the 2 brothers is that I don't think they will take it private. I have no idea if another party may come in though. I find YHI and the situation very similar to another local listed company that was recently acquired -- HTL. HTL has very similar history, fortunes and shareholding structure like YHI. They were doing the same thing during the downturn of their industry. The first sign of turning around was the price of leather hide dropping. I never expected the Phua bros to take HTL off. They only agreed to sell to China when a very good offer was made, almost 2x NAV. (The side story is that I never really found out why/how/what the china company yihua acquired HTL for when they seem to disappear after paying out, along with their website).

I think the Tays will continue as it is. Richard was always mentioning about his son being in the company and being shown the ropes during the agms. I believe he is being groomed to take over.

Glad that you were there for the AGM and could share what you learnt. Did they say how much of the space was rented out? Would be great if you could share more. Seems like we might be able to see some fruits from their restructuring this Q1 results release.

[Mushy]

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.