Monday, July 27, 2009

HTL International

Reviewing furniture sector and start with the one with bigger market cap, HTL just behind Man Wah. Although the annual report is from Dec 2008, it is still worth reading about the risks and future outlook.

Issues/Risks faced:

  1. Snowstorm in China disrupting supply chain.
  2. Fire burning sofa factories.
  3. Surge in commodity price, for oil, leather hides, wages and freight rates.
  4. Forex volatility
  5. Government policies at both the national and international levels covering free trade and the avoidance of protectionism
  6. Anti-dumping duties in China by World Trade Organization till 2015. Therefore if exported at unfairly low price compared to alternative country, duties can be imposed.
  7. Raw leather hide account for 50% of upholstery cost. Cattle raw hide is dependent on consumption of beef
  8. Cyclical demand for furniture, housing starts, interest rate level, credit availability.
  9. Seasonal operation. Lower in July to Auguest (summer month)
  10. PRC VAT rebate and import duties. Currently, VAT rebates are reduced for this sector. Eg, VAT rebate for finished leather is 0%(instead of 8%)
  11. Possible mandatory duty deposit for imported raw material. Currently, exempted.
  12. Production of leather is pollutive and might require upgrade to waste treatment.

Actions taken:
  1. Relocation from Malaysia and Singapore to China to cut costs.
  2. Hedging
  3. Restructuring in past years


KPI:
  1. Free Cash flow SG$5.6 million
  2. Net Gearing 21.4%
  3. EPS dipping from 13.00 to -4.86
  4. NTA dropping gradually from 49.55(2006) to 45.86(2008)
  5. ROE dipping 23.37% to -9.48%
  6. Enhance viability as critical supplier to customer, large and small, provding reliable supply chain

Market
---
Europe (46% to 50.2%),
North America (9.6% to 7.5%),
Asia (13.9% to 14.9%)
Greater China (10.4 to 15.3%)

Sofa (81.2% to 62.6%)
Leather (10.7% to 14.9%)
Home Furnishing (8.1% to 22.5%)

Dividend yield:
  1. 2006 - 4.94%($0.925)
  2. 2007 - 1.63%($0.38)
  3. 2008 - 0%


Review of Operation
----
"This unrealised loss of S$20.4 million comprised (i) a translation loss arising from the revaluation of the Group’s trade receivables/payables/loans amounting to S$5.8 million; and (ii) a mark to market charge on forex derivative contracts totaling S$14.6 million, relating mainly to forex options entered to hedge the US Dollar, Japanese Yen, Euro and the Singapore Dollar (FY 2007, the Group recognised a translation gain of S$1.8 million and mark to market credit of S$1.1 million).
After the balance sheet date, in January 2009, approximately S$12.1 million mark to
market losses were not realised but instead will be credited as income in 2009."

Don't understand (ii) Mark to market charge ... and how it will become a income of S$12.1 million. Perhaps someone can explains that more simpler.

Business
---
Sofa and leather declined from S$28.1 to S$10.5 million.
Home Furnishing improved excluding exception items. Awarded in 2008 Q2 a Berlin project to refurnish apartment(Amt not stated). Trying to secure new franchise.
Strong mention of forex loss affecting cost

People
---
Mr Phua Yong Pin, Chairman. Eldest of three Phua brothers.
Mr Phua Yong Tat, CEO.
Mr Siew Peng Yim, CFO. Cash flow management.
Mr Tay Kheng Hee, Director, Manage the hedging, etc.
Mr David Macleod, MD of Multiport Logisitics that handle freight and transportation
Mr Goh Choo Guan, Director of Sofa Manufacturing Operations,
Ms Leo Sai Tin Jane, Director of Leather Manufacturing Operations

Options
---
742,187 @ 0.37 expires 2012
2,335,500 @ 0.82 expires 2014

Unsettled Trade Recv of around S$17,498,000
Top shareholders contains most of the Singapore banks.

Review: Mention of the unrealised forex loss, although it don't seems to be a key factor. Mentioned of increased cash, however it is short-term bank loans of $30,000k and other debts.

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