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Several online pieces have been written about LY Corp. They are generally positive and reflective of the IPO's sales angle. While it is natural to be drawn to the sexy bits, an investor should never forget to keep tabs on the risks involved. It is the key to deciding if the market price for any issue is worth paying for. And because companies are seldom open about things which can damage their reputation/market value, it is necessary to seek out the potential issues that may plague a company as part of the assessment process.
Local men often seek local women who are not only physically attractive, but also possess certain moral values such as loyalty and 'not a gold digger.' Instinctively, men know how to protect themselves when searching for a long-term partner. So why should they behave differently when searching for a long-term investment?
The offer document can be found here:
http://www.sgx.com/wps/wcm/connect/ed70b...bf0a9f5a50
1) LY Corp's business (model) is not unique. There are numerous furniture manufacturers in Malaysia just like LY Corp. Some of them are listed in Malaysia as well; such as Lii Hen, Lattitude Tree Holdings Berhad, and Jaycorp. All of them procure their wood supply from Malaysian timber companies, manufacture in Malaysia, and sell to US companies in US dollars. Some of them, like LTHB, has manufacturing bases in Thailand and Vietnam, but the production capacity is small. But apart from such cases, we should expect the majority of these furniture manufacturers to produce similar levels of profitability. Even the websites of these companies look the same.
2) It is therefore worthy of inquiry that LY Corp's net margins should be so high in relation to its competitors. The following information can be found on page 132.
Net margins of LY Corp vs the closest competitor vs the average of its following 6 competitors
2014: 8.02% vs 7.07% vs 7.21%
2015: 16.79% vs 10.4% vs 7.98%
2016: 15.12% vs 11.73% vs 9.34%
Something big must have happened for its margin to double from 2014 to 2015. Or they must be doing something very different from their competitors, to be able to earn margins that are not only much higher than its closest 6 competitors, but even closest competitor. Management claims that this is due to their superior management of work processes, dubbed LY-6M. I don't have indepth knowledge of furniture manufacturers so I shall reserve judgement. Do share if you know something.
3) Following the good years of 2015 and 2016, LY Corp paid plenty of dividends. So you can be certain that the probability of the profit numbers being aggressively padded is low. Debt is low and their current net cash is about 38% of NAV. So if they are generating so much wealth, why will they wish to sell part of their good business?
Dividend history (in RM)
2014: 5m
2015: 8m
2016: 38m
2017: 55m
4) The offer document presented 3 good years. Are these 3 years representative of its past, and future? While there are no other publicly available information on LY Corp, looking at one of its closest competitor Lii Hen might offer us some clues on the industry, and LY Corp.
Lii Hen sales,net profit, and net margin history (in RM)
2016: 623m, 73m, 11.7%
2015: 546m, 57m, 10.5%
2014: 397m, 28m, 7.0%
2013: 315m, 17m, 5.3%
2012: 346m, 21m, 6.0%
2011: 284m, 11m, 3.8%
2010: 260m, 17m, 6.5%
2009: 218m, 15m, 6.8%
2008: 173m, 5m, 2.8%
2007: 150m, 1.1m, 0.7%
2006: 137m, 0.8m, 0.5%
2005: 101m, 0.7m, 0.6%
2004: 91m, 2.9m, 3.1%
2003: 88m, 1.2m, 1.36%
2002: 88m, 6.2m, 7%
2001: 82m, 8.3m, 10.1%
2000: 88m, 9.8m, 11.1%
1999: 82m, 12.0m, 14.6%
1998: 58m, 8.2m, 14.1%
Refer to Lii Hen's ARs:
http://disclosure.bursamalaysia.com/File...&id=129630
http://disclosure.bursamalaysia.com/File...&id=141305
http://disclosure.bursamalaysia.com/File...&id=158971
http://disclosure.bursamalaysia.com/File...TTACHMENTS
From the net margins of the past 19 years, we can see that the business has gone from good to bad to good again. Clearly, it is a cyclical business. But when the net margins are mapped against the USD/MYR, there seems to be a relationship where stronger USD/MYR will produce better margins. Prior to 2005, MYR was pegged to the USD at about 3.8. After 2005 when the peg was lifted, USD/MYR weakened to about 3 in 2008. During the same period, Lii Hen's net margins were weak. From 2015, the USD/MYR strengthened above above 4. During the same period, Lii Hen's net margins were strong. The significance of USD/MYR to furniture businesses in Malaysia -- like LY Corp's -- has been detailed in their offer document. The question for investors is whether USD/MYR will strengthen or weaken. And if LY Corp's management is selling out, are they of the opinion that the exchange rate will no longer be as favourable in the near future? Is this the beginning of their cyclical downtrend?
Local men often seek local women who are not only physically attractive, but also possess certain moral values such as loyalty and 'not a gold digger.' Instinctively, men know how to protect themselves when searching for a long-term partner. So why should they behave differently when searching for a long-term investment?
The offer document can be found here:
http://www.sgx.com/wps/wcm/connect/ed70b...bf0a9f5a50
1) LY Corp's business (model) is not unique. There are numerous furniture manufacturers in Malaysia just like LY Corp. Some of them are listed in Malaysia as well; such as Lii Hen, Lattitude Tree Holdings Berhad, and Jaycorp. All of them procure their wood supply from Malaysian timber companies, manufacture in Malaysia, and sell to US companies in US dollars. Some of them, like LTHB, has manufacturing bases in Thailand and Vietnam, but the production capacity is small. But apart from such cases, we should expect the majority of these furniture manufacturers to produce similar levels of profitability. Even the websites of these companies look the same.
2) It is therefore worthy of inquiry that LY Corp's net margins should be so high in relation to its competitors. The following information can be found on page 132.
Net margins of LY Corp vs the closest competitor vs the average of its following 6 competitors
2014: 8.02% vs 7.07% vs 7.21%
2015: 16.79% vs 10.4% vs 7.98%
2016: 15.12% vs 11.73% vs 9.34%
Something big must have happened for its margin to double from 2014 to 2015. Or they must be doing something very different from their competitors, to be able to earn margins that are not only much higher than its closest 6 competitors, but even closest competitor. Management claims that this is due to their superior management of work processes, dubbed LY-6M. I don't have indepth knowledge of furniture manufacturers so I shall reserve judgement. Do share if you know something.
3) Following the good years of 2015 and 2016, LY Corp paid plenty of dividends. So you can be certain that the probability of the profit numbers being aggressively padded is low. Debt is low and their current net cash is about 38% of NAV. So if they are generating so much wealth, why will they wish to sell part of their good business?
Dividend history (in RM)
2014: 5m
2015: 8m
2016: 38m
2017: 55m
4) The offer document presented 3 good years. Are these 3 years representative of its past, and future? While there are no other publicly available information on LY Corp, looking at one of its closest competitor Lii Hen might offer us some clues on the industry, and LY Corp.
Lii Hen sales,net profit, and net margin history (in RM)
2016: 623m, 73m, 11.7%
2015: 546m, 57m, 10.5%
2014: 397m, 28m, 7.0%
2013: 315m, 17m, 5.3%
2012: 346m, 21m, 6.0%
2011: 284m, 11m, 3.8%
2010: 260m, 17m, 6.5%
2009: 218m, 15m, 6.8%
2008: 173m, 5m, 2.8%
2007: 150m, 1.1m, 0.7%
2006: 137m, 0.8m, 0.5%
2005: 101m, 0.7m, 0.6%
2004: 91m, 2.9m, 3.1%
2003: 88m, 1.2m, 1.36%
2002: 88m, 6.2m, 7%
2001: 82m, 8.3m, 10.1%
2000: 88m, 9.8m, 11.1%
1999: 82m, 12.0m, 14.6%
1998: 58m, 8.2m, 14.1%
Refer to Lii Hen's ARs:
http://disclosure.bursamalaysia.com/File...&id=129630
http://disclosure.bursamalaysia.com/File...&id=141305
http://disclosure.bursamalaysia.com/File...&id=158971
http://disclosure.bursamalaysia.com/File...TTACHMENTS
From the net margins of the past 19 years, we can see that the business has gone from good to bad to good again. Clearly, it is a cyclical business. But when the net margins are mapped against the USD/MYR, there seems to be a relationship where stronger USD/MYR will produce better margins. Prior to 2005, MYR was pegged to the USD at about 3.8. After 2005 when the peg was lifted, USD/MYR weakened to about 3 in 2008. During the same period, Lii Hen's net margins were weak. From 2015, the USD/MYR strengthened above above 4. During the same period, Lii Hen's net margins were strong. The significance of USD/MYR to furniture businesses in Malaysia -- like LY Corp's -- has been detailed in their offer document. The question for investors is whether USD/MYR will strengthen or weaken. And if LY Corp's management is selling out, are they of the opinion that the exchange rate will no longer be as favourable in the near future? Is this the beginning of their cyclical downtrend?
