Monday, August 31, 2009

Review on Cacola Holdings August 2009



I been waiting for the 21st August court result but it seems like it will not be released yet. However, it have since acquire some subsidiaries and disposed Cacola Home Decor. Also, the stock have suddenly became more liquid, maybe because of the 2 furniture IPOs that attracted attention to similar companies or people who divested away Man Wah delisting. No idea though, but

I bought only $1,000 worth of Cacola Holdings during 17th October 2008. It shows how little confident and that I rather be charged a higher commission because of the minimum $25 dollar per transaction. Currently, the company has drastically poorer revenue for FY2009 as seen in the quarterly reports and the profit guidance with every quarter.

Why I bought it:

I was tracking the company for a couple of months and liked the ROE of 40% in FY2007 and was okay with the slower growth of around 10% from the quarterly updates for FY2008. It was also cash-rich and little debt. Based on just cash asset and subtracting the debt, it had almost 50% of its price in net cash. I also anticipate that Chinese yuan will appreciates to slow down the huge growth in FY2007. It also has greater margin than the other furniture companies in Singapore, therefore it should have a safe moat. In addition, the company have clear expansion plans for both its manufacturing and sales. It was also small cap, and I like it because I hope to find companies before it get into the radar of bigger institutional investors.

The business was also easily understandable, create and sell furnitures. In furniture sector, I believe lowest cost company is important since furniture typically have no brands. You will buy a table for its design, quality and more importantly price. There are no logos/brands printed in furnitures you buy. Design can be 'copied', quality is dependent and not easy to compare. Most people do not really know the different kind of wood and quality at all. For price, while shopping in Singapore for furniture for my home, it is easy to know that the lowest priced furnitures are mostly manufactured in China or Malaysia (although now I know Vietnam too is low-cost from the IPO of Latitude Tree). Furthermore, with the huge number of properties in China, regardless of old or new, people should tend to buy new furnitures and have budgeted for it before buying a house.

Since then: It did not give dividend in FY2008, which seems to have a huge impact for most investors. It did not affect me since I still preferred business growth than dividend, especially for a small cap company. The financial controller also quited for personal reasons.

Then, the consecutive profit guidance came with the reasons of global financial crisis which has resulted in a decrease in sales orders from the PRC distributors and overseas customers.

Even worse, Cacola Holdings has failed to make payment of HK$21,379,644.75 and was served with a Writ of Summon by IW Asset Management Limited. Up till today, it is still ongoing and I have no clue how IW Asset Management Limited is related to Cacola except it was a loan owning to IW Assets in 5th March 2009.

The company then appoints Mr. Wong Chi Man, ex Financial Controller for Pan Hong Property, as its Financial Controller. A quick check of his reason for leaving was "To pursue new career opportunity." in February 2008. Not sure what happened but his next work was at Henry Wong & Company, Certified Public Accountants for June 2008 to June 2009.

The first 2 quarters results were 70% less revenues than the previous year. Also, it establish the fully-owned subsidiary Grateful Victory that is an investment holding for USD$50,000. Not sure what is the point of it too. It already had another subsidiary, Sincere Treasure with paid-up capital of US$60,000, at British Virgin Island. There also have only 79 Cacola Specialty Store compared to 129 at December 2008. The company has yet to finish using the IPO proceed though, since it delay the mega store and have RMB$42.8m in balance.

Meanwhile, Man Wah has also delisted since and probably will look for an IPO in Hong Kong where valuations are better than Singapore. Lorenzo and HTL has bought back some shares recently too. The furniture sector is currently valued very lowly. Just found out another related listed company, Pertama Holdings(P22) do wholesales under the name, Harvey Norman.

Also, note for FY2012, the company tax incentive will be gone and need to pay the full 25% tax for PRC. Sadly too, neither Chairman nor CEO of the company attended the AGM for FY2008.

Actions: I decide the outlook is tougherI realised after buying just how competitive the furniture sector is. Looking at the exhibitor list of some furniture trade shows many companies. I did not look at the IPO or search for its competitors in China or Hong Kong. Perhaps I should, but there are lots of unlisted companies too. Also, the way the company is handling the Writ of Summon is worrying since the company does have enough cash and there must be reasons for not paying immediately.

Also, it is harder to find data on China with few websites in English. For example, I still cannot find trade data of Dongguan, where Cacola is based, or China easily. There is a China Statistical Yearbook that is hard to use. Perhaps it is easier to find statistics in Chinese. By the way, Dongguan is near Guangdong.


References:

  1. Cacola 2009 Q2 Unaudited results
  2. ExtraordinaryProfits blog that I learned about Cacola
  3. Euromonitor report in China (Just summary, need payment for statistics)
  4. Euromonitor report in Singapore
  5. Panjiva - website that tracks shipments and have info


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