Monday, August 17, 2009

IPO: Latitude Tree

Since I am invested in Cacola, a furniture company, I look into the IPO of Latitude Tree, a Vietnam manufacturer of wooden furniture.


We are principally engaged in the manufacture and sale of indoor wooden furniture using a variety of composite wood as well as solid wood materials including hardwood such as poplar, pine, oak and rubberwood. Our product range is mainly focused on Collection Sets. Our main product categories are bedroom Collection Sets, dining room Collection Sets, living room Collection Sets and others.

Major Customers:

* Ashley Furniture
* RiversEdge Furniture
* Broyhill Furniture (Decreasing)
* Casana Furniture
* Embassy International (Change from PRC to Vietnam)
* Winners Only
* Magnussen Home

Major Suppliers:
* Akzo Nobel Coating
* Shinex Coatings Joint Stock
* B.T. Hunter Enterprise Co., Ltd (for MDF & particle board)
* Sen Hong Enterprise Co., Ltd (for plywood, one of few suppliers that obtain cert that pass the California Code of Regulations governing formaldehyde emissions from composite wood products)
* Dragon World Industrial Co., (for MDF, poplar & particle board)

Major Sub-contractor:
* Lim Yee Fancy Plywood (for layering of veneer board, around 5%)

Trade Fairs attended
* High Point Furniture Market,
* Las Vegas Furniture Market,
* Malaysia International Furniture Fair,
* Shenzhen International Furniture Exhibition,
* Index Dubai 2007

Policy
* Receivable 14 to 21 days
* Payable 30 to 60 days
* Inventory turnover around 60 days

IPO Detail:

Net Proceed: S$6.14m
$2.00m for upgrading and expansion of production facilities
$2.00m for expansion of warehouse facilities
$2.14m balance for working capital
Dividend policy >= 30% net profit for FY2009, FY2010, FY2011

Future Plans

  • 10% increase in annual production capacity with upgrade,
  • Expansion of warehouse facilities for value-added service,
  • Explore opportunity as ODM instead of just OEM by purchasing interior design software,
  • Explore expansion to India, PRC, South Africa and Eastern Europe,
  • Expand product range for SOHO, occasional furniture, baby’s bedroom furniture and entertainment furniture

Competitive Strength:

  • Largest exporter of wooden furniture in Vietnam between 2006 and 2008
  • High rate of repeat customer, around 97%
  • High automation with machinery from Taiwan (claimed to be lower maintenance cost than European)
  • Long term rental tenure
  • Minimum salary of US$62/month in Vietnam vs US$162/month in PRC

Competition:

  • Poh Huat Furniture Industries Vietnam Joint Stock Company
  • Kaiser Furniture Vietnam Joint Stock Company
  • Shing Mark Enterprises Co., Ltd
  • Sanlim Furniture Co., Ltd
  • Fortune Furniture Co., Ltd

People:

  • Lin Tzu-Keng, CEO at 2009 joined 1988
    Directorship in 9 companies

  • Yek Siew Liong, Non-executive Chairman at 2009 since 2007
    Directorship in 10 companies
    Previous Directorship in 6 other companies

  • Yeoh Joe Son, Finance Director at 2009 joined 1995

  • Toh Seng Thong, Non-Executive Director at 2009 joined 2003
    Directorship in 1 company, Adventa Berhad
    Previous Directorship in Golden Pharos Berhad, resigned in Sep 2008 reasons unknown

  • Ng Wei Hua, Independent Director at 2009
    Directorship in 2 companies
    * Metro Paragon Sdn Bhd
    * Platinum Support Sdn Bhd

  • Leow Siew Beng, Independent Director at 2007
    Directorship in 1 company, China Club Investment Pte Ltd
    Previous Directorship in 10 companies
    * Including Eastgate that was subject to CID investigation in 2005 for infringing IP rights occuring before Mr Leow joined.

  • Lin Chin-Hung, Alternate Director at 2009 joined 2001

    No board interlock

    Expected renumeration for FY2009, Band A for all

Investment tips:

Why not?
  • Net Profit drops in FY2008
  • Dropping profit margin
  • Negative net working capital
  • COGS of around 85% of total revenue compared to around 68% for other similar furniture companies in SGX, except Sitra 85%
  • Revenue to Canada and Malaysia dipped, heavily relying only USA market
  • Cost of raw materials take 42%, industrial material and production overhead 33%, direct labor 9%
  • Labor law requiring minimum salary and insurance coverage
  • Tax incentive of 50% for the 25% corporate income tax will reduce to 15% and no incentive completely in 2011
  • Subsidiary RK Resources tax exemption may expires
  • Adoption of new accounting standard undergoing, so reclassification possible
  • Moved from Malaysia to Vietnam in 2000 due to lower labor and production cost, however with laws like minimum salary and insurance coverage, is it still valid?
  • Major customers, Ashley Furniture and Broyhill Furniture also manufacture their own furnitures. Therefore, possibility of not buying from Latitude Tree.
  • Increasing competition with growing furniture companies in Vietnam (Source: General Statistics Office in Vietnam)
  • Competition in Vietnam includes Scancom, IKEA, Scanasia
  • No long-term committment with customers
  • Reliance of US economy that has seen declining sales of furniture
  • Unionized labor at subsidiary RK Resources, with next meeting at 2012


A quick search of Ashley Furniture shows that it is the largest furniture retailer in USA. However, without any long term commitment, can Latitude Tree continue to get revenue from them. Also, does have a negative working capital too. Searching further for export potential of wooden products led to some bad expectation of not hitting the target exports this year. Furthermore, with the expansion increasing production by only 10% and the 2-shift production line already using 90%, there seems to be limited growth in revenue unless more acquisition or higher profit margin products are introduced. In additional, there are competition with companies like IKEA, Scancom, and also stated-owned companies.

References:

  1. Latitude Tree Prospectus
  2. General Statistics Office of Vietnam
  3. Wooden exports show signs of recovery
  4. Wooden products sector may miss export target


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3 comments:

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Anonymous said...

The FY2010's of Latitude Tree results proved that your investment tips are totally full of rubbish and with all the wrong and distorted facts....