Friday, August 28, 2009

IPO: Passion Holdings

Company Info:

We are principally engaged in the design, production and sale of a wide range of handicrafts and furnishings. Currently, our products are sold either under our brand name “Passion” or as ODM products through our distributors both in the PRC and overseas.

Our products can be broadly divided into five series, namely the rattan-wood series, the bamboo-wood series, the MDF series, the wood series and the iron series. Our products, such as wooden photo and picture frames, small rattan-wood furniture, and other decorative objects, can be widely used as decorations, interior designs or home furnishings. Our manufacturing facilities are located in Longyan City, Fujian Province, the PRC. Most of our products are exported to countries outside the PRC which include the UK, France, Spain, Italy, Turkey, Greece, Canada and the USA. As at the Latest Practicable Date, our Group has a diversified base of more than 200 distributors located overseas. Our export sales accounted for approximately 84.1% of our total revenue in FY2009. Our Group also has a local distribution network of more than 200 points of sale in the PRC through our 10 local distributors.

Yet another furniture IPO after Latitude Tree, so I checked up the issue manager if there were from the same company. Nothing useful but just for interest, the issue manager/sponsor of the last few IPOs, (Latitude Tree, Mary Chia, Singapore Medical Group, JLJ Holding and Heatec Jietong) was PrimePartners. For Passion Art, the company is Genesis Capital. The website of Genesis Capital shows their previous deals with Gallant Venture, Hengxin Technology, Sino Environment, etc.

Interestingly, I compared the expansion plan of Latitude Tree and Passion Holdings although Passion Art isn't completely into wood (iron also) and not furniture(ornaments and handicrafts).

Passion Holdings: S$6m => increase 60% to 70% capacity.
Latitude Tree: S$2m => increase 10% capacity.

It is not fair since % increase in capacity does not imply equal increase in revenue %.

No image since I cannot find the website, or easily find furnitures with "Passion" brand since passion is a very common word.

IPO Detail:

Net proceed: S$18.6m
$6.0m for expanding production capacity (increasing by around 60% to 70%)
$8.0m for expanding sales and distribution network within PRC
$4.0m for promoting and strengthening "Passion" brand name in PRC
$0.6m balance for working capital

No fixed dividend policy

Plans:

  • Expanding production capacity,
    We intend to expand our production capacity by investing in additional production lines and machinery such as wood processing lines, spray-painting machines, assembling machines, packing machines and frame production lines at our existing plants. We also intend to invest in technological enhancements to our production process to increase the quality of our products as well as enhance our manufacturing efficiency to reduce manufacturing costs. Further, we intend to purchase land use rights for the purpose of building a new plant to set up additional facilities in line with our efforts to broaden our sales and distribution network. Our Directors have identified possible locations for the new plant but have not committed to or entered into any agreements for the
    acquisition of the land use rights or such assets.
  • Expand our sales and distribution network within the PRC and strengthen our “Passion” brand name,
    We intend to expand our sales and distribution network by appointing additional distributors in the big cities of the PRC, such as Shanghai, Beijing, Guangzhou, Dalian, Qingdao and Xiamen, which are the more economically significant areas. These new distributors will also set up Passion Art specialty stores so as to expand our network and build our brand name within the PRC. In order to incentivize our local distributors to set up more Passion Art specialty stores in the PRC, we intend to subsidize 50% of the renovation costs to be incurred by our local distributors in setting up new Passion Art specialty stores. At the opportune time, we intend to establish Passion Art specialty stores which are wholly managed by us.As a result of our brand development and marketing efforts in the recent years, our products under our “Passion” brand name have begun to gain recognition amongst consumers in the PRC. We intend to
    further strengthen and promote our “Passion” brand name as we believe it to be important to the success of our business strategy and our future growth, particularly in the PRC.
  • Enhance our design and development capabilities,
    We intend to employ more skilled and experienced design and development personnel and strengthen our core team of designers to oversee the design and development work of our Group. We intend to increase the range of products that we manufacture. In addition, our design and development team will continue to develop or institute substitute processes that focus on improving production efficiency and consequently cost reduction.
  • Expand our business through acquisitions, joint ventures and strategic alliances,
    We may expand our business through acquisitions, joint ventures and strategic alliances that we believe will complement our current and future businesses. We believe that suitable acquisitions, joint ventures and strategic alliances will give us access to new markets and prospective clients as well as new businesses. They may also bring about greater economies of scale and provide an impetus for our future
    growth.
  • Acquire forest base for supply of raw materials,
    One of our medium-term plans is to acquire forest bases comprising high-yield and fast-growing trees to provide us with more wood, which is one of our main raw materials. This will provide us with a constant supply of wood, and reduce the costs of our key raw materials. We will make such an acquisition if a suitable opportunity presents itself and only at an attractive price.


Competition:

* Guangdong Yihua Timber Industry Co., Ltd.
(宜华木业股份有限公司)

* Markor International Furniture Co., Ltd
(美克国际家具股份有限公司)

* Shengshi Bainian Home Decoration Products Co.,Ltd.
(盛世百年家居饰品有限公司)

* Dongguan City Yiteng Furniture Production Co., Ltd.
(东莞市艺藤家具制造有限公司)

* LADD Furniture, Inc.
(美国莱德家具公司) USA

* Straten Co., Ltd.
(德国诗德蓝家居饰品公司) Germany

People:

* Chen Huiling, Executive Chairman and Founder of Group, since 2001
Previous Directorship in Yiwei, sold company to someone else

* Zhao Long, Chief Executive Officer, since 2006

* Hong Wei, Independent Director, appointed 2009

* Lim Jun Xiong, Independent Director, appointed 2009
Current Directorship with:
Gentrade Pte Ltd
Mirach Energy Limited
Previous Directorship:
CPA Australia Ltd
HSBC Trustee (Singapore) Limited
HSBC International Trustee (Singapore) Limited
Global Asset Protection Private Limited

* Tan Thiam Hee, Independent Director, appointed 2008
Current Directorship with:
Koon Holdings Limited
Koon Construction & Transport Co.
Pte. Ltd.
Gems Marine Pte Ltd
Entire Engineering Pte Ltd
Entire Construction Pte Ltd

Previous Directorship:
Bodysential Pte Ltd
Haw Par Capital Pte Ltd
M & G Maritime Services Pte Ltd
Pickwick Securities Private Limited
Sovereign Marketing Pte Ltd
Sports Services Ltd
Straits Maritime Leasing Private Limited
Underwater World Attractions Pte Ltd
Underwater World International Pte Ltd
Underwater World Singapore Pte Ltd
USE Enterprise Pte Ltd

No board interlock

Expected renumeration for FY2010: Band A for all (< S$250,000)

Investment tips:

Why not?
* The major customers contribution % of revenue is decreased in FY2009, although it can be due to increased overall revenue.
* Most of net proceed used in PRC sales, when only < 20% of revenue in PRC. Why not focus overseas but rather at PRC when it already mentioned competitve? (although revenue clearly growing very rapidly in PRC)
* 100% Reliant on distributors
* Intends to subsidize/pay 50% of renovation costs of PRC distributors, mentioned of 1 distributor alone and it took RMB$25.8m already
* Trade recv to assets ratio is increasing, risks of defaulters
* Company observes general increase of labor cost
* Subsidiary, Yirong Arts & Crafts will be taxed at 25% starting from Jan 2010 instead of the current 12.5%
* Pre-IPO investors paid < half of what new investors are paying
* Does not expect seasonality, weird because Latitude Tree mentions it does in Jan to Mar due to Christmas, New Year
* COGS breakdown, Material 90%, Direct labor 6%, manufacturing overhead 3%, design 1% (compare with Latitude Tree, Materials 42%, industrial material and production overhead 33%, direct labor 9%). No wonder it wants to possible get a forest since materials takes such a huge %.
* Lots of advances and borrowing by Chairman, Ms Chen Huiling. A RMB130m dividend at FY2009 for Ms Chen Huiling only was used to offset the amount she owned.
* 10x of advertisement used in 2009(RMB 9m compared to 0.9m in 2008) but grown does not show similar increases in revenue yet.
* Interest on bank loans increasing from 7.71% to 8.57%
* PRC law requirement for 10% of profit after tax to be kept at reserve till > 50% of registered capital
* Sundry payables rises from RMB1,663 to RMB4,590,122, not sure about the detail.


The comparison/concerns of labor costs for both Passion Holdings and Latitude Tree seems invalid since it took < 10%. I wonder why they mention so much on it when material costs and production overheads are taking the bulk of COGS.

References:

  1. Genesis Capital
  2. Passion Holdings - Prospectus

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3 comments:

Anonymous said...

positive points:

1. very low PE (3.1x at IPO price of 25c)

2. growth even in recession year 2008/9

3. growth in home market China nearly 100%, the home market will be the future growth driver of the group

4. sells to large Western customers

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