Price @ 9/12/05 - 9.5 cts
Book Loss - 38.5%
Price @ 13/01/06 - 11 cts
Book Loss - 28.2%
Company Background
Asia Dekor Holdings Limited was established in 1994 and listed on the Singapore Stock Exchange in November 1999. The Company is principally engaged in the design, manufacture and distribution of laminated wood flooring, high/medium density fibreboards and related products. Currently, the Group has two production facilities in China, located in Shenzhen and Heyuan, with an annual production capacity of 16 million m2 laminated floors and 200,000 m3 fibreboards, respectively. The Group is now in course of building a factory in Huizhou for the manufacture of particleboards, with an estimated annual capacity of 200,000m3. Construction is expected to be finished by early 2006.
Asia Dekor, through a joint venture, has a well established distribution network with over 1,500
exclusive distribution outlets throughout China.
Historical Review
The revenue has been growing every year and the sales and profit hit the record in FY02 with a sales of RMB955M and net profit of RMB118M. The company suddenly plunged into a loss of RMB36M with revenue tumbled by more than half to RMB462M in the following year. There was little telling signs in FY02 that the company will meet with such disaster in the following year. In FY03, the company was badly hit by the double whammy of increasing imported raw material costs (MDF & HDF - due to strengthening of Euro) and the switching of consumer preference to mass market products which commanded lower sales price and margin.
Financial Performance
The performance did pick up in FY04, apart from the continued strength of China economy, the company also restructured its sales and distribution network to be undertaken by its 40%-owned joint venture, hence, it no longer required to maintain its nationwide distribution network and other related business activities. Accordingly, the Group’s selling and distribution costs, and general and administrative expenses, decreased respectively by 59.3% and 43.4%. The company also embarked in building its own factory to manufacture MDF & HDF to reduce its reliance on imported raw material over long term. Gross profit margins improved from 23.3% in 1H05 to 27.9% in 1H06, benefiting from the lower costs associated with manufacturing the fibreboards in-house at the Heyuan facility (in place of the fibreboards imported from Europe).
Balance Sheet and Profit & Loss
For FY05, sales to JV & subs were RMB378.5M or 84% of total sales, a slight decrease from 86% in FY04.
Due to this expansion for manufacturing the fibreboards in-house, for year ended FY05, the company has
sizable bank loans of RMB223 (S$45M) which is a concern to watch as this could be a drag in its profits if the sales & operating does not improve in the future. As of 30 September 2005, net gearing was 0.32x. Cash and bank balances amounted to RMB59.4 million, bank loans to RMB268.7 million and loans from Directors amounted to RMB7.6 million. Nevertheless, the company has relatively strong operating cashflow of RMB90M or S$18M for FY05 and RMB78M for 1HFY06.
Another point of concern are the
related party transactions. As China companies are not famous for corporate governance, it is cautious to scrutinise related party transactions carefully.
The
receivables from Joint Venture of RMB49M (S$9.M) as at Mar05 is rather high although this has decreased from RMB61M. For Sep05, Asia Dekor reported RMB15.3M as share of profit from JV, a decrease from RMB22.7 for the corresponding period. Interests in joint ventures of RMB191.8 million as at Sep05 represented the Group’s share of net assets of the joint ventures, PDG (40%) and Asia Dekor Borden (Hong Kong) Chemical Company Limited (50%). Going back to AR2005, in notes 14 (i), it was reported that the capital contribution by the company to PDG was RMB180M, however, in the BS, the total
share of net assets in JV was only RMB179M. It is rather difficult to explain why except for the possibities of loss by PDG or dividend distribution.
The company also has a
substantial level of inventory of RMB115.7M (S$23M) for FY05, a big jump from RMB70.4M in FY04, RMB37M in WIP (RMB17M) and RMB42M (RMB21M) in Finished goods. It is rather not logical for the company to carry such a high level of inventory in finished goods as it is now mainly selling through its JV and it is riskier to have high inventory for consumer goods due to changing taste. There was no provision for stock obsolesence and write-offs in FY05. The positive sign is that the inventory reduced to RMB94.M in Sep05 on higher sales in this period.
Prospects
As announced in 1HFY06 results on 14/11/05:The Group posted encouraging results for the first half-year ended 30 September 2005 (1H06). Net profit after tax grew 25% to RMB47.3 million from RMB37.8 million in 1H05.
Turnover in 1H06 rose 25.5% to RMB292.9 million due to strong demand for the Group’s laminated flooring products and increased contribution from the Heyuan factory. Sales of laminated flooring products increased from 5.29 million m2 to 6.24 million m2.
Gross profit for 1H06 increased significantly by 50.6% from RMB54.3 million to RMB81.8 million while gross profit margin improved from 23.3% to 27.9% in 1H06. This was due to lower material cost of HDF by shifting from Europe to self-supply from the Heyuan factory.
Going forward...The Heyuan factory commenced production of HDF and MDF in July 2004. The Directors expect that, with the increasing demand of HDF and MDF in the markets of Shenzhen and Dongguan, the Heyuan factory would continue to contribute positively to the Group’s profitability in the second half of the financial year ending 31 March 2006. The construction of the particleboard factory in Huizhou is in the final stage. Production is expected to commence in the first quarter of the year 2006.
Prestige...It has been reported that its brand "Power Dekor" has been named as the best selling laminated floor products in China for the 7th consecutive year in year 2004.
Also, in an SGX annoucement on 18 Aug 05...The World Brand Summit was held in Beijing on 6 August, 2005, with the World Brand Laboratory ("WBL") announcing the 2nd annual "Top 500 Most Valuable Brands in China". "Power Dekor", the flagship product of Asia Dekor Holdings Limited ("Asia Dekor"), was ranked in 160th place with a valuation of over
RMB 3.8 billion. This ranking represents a leap of 55 places as compared to 2004, and an increase of RMB 1billion in terms of value. For a second successive year, "Power Dekor" has ranked first in the construction materials sector. This raking of 160th place compared favourably with Eagle (402nd) of Eagle Brand Holdings Limited and Want Want (449th) of Want Want Holdings Limited.
This is amazing!!! At 11 cts and issued share of 847M, its capitalisation is S$93M compared with RMB3.8B or S$770M+. At this valuation, Asia Dekor is worth 90cts!
My assessment on this investment...I have invested in this counter since May01, and in May02 on the back of good histrical results, lure of future prospects and reasonable dividends. At the peak of my speculative interests, I have a whopping 120 lots. However, in the subsequent poor operating results I cut my stake to 65 lots taking deep losses of $4,383.76 up to Oct02. One thing I learnt on investment is never to be overly confident (although it also limit my upside) in those small companies (revenue less than $100M). I see that there are many concerns and risks as described above. Based on my forecast for FY06, the company should still be showing positive results and at a forward PE of below 6 and dividend yield of 4.1% at 11 cts.
It is at least a
hold at the current level but I may be looking
to reduce my stake at a higher level of above 13 cts depending on the results for FY06. For it to qualify a long-term investment for me, its operating cashflow must be strong, the margin must be maintained or improving and its gearing must be reduced gradually.
My portfolio has been on a downward trend since Feb05 and after hitting a low in Nov05. As of 20 Jan'06, it had rebounded by S$10K from Dec05-Jan06 period on the back of recovery of China Stocks.
As at 20 Jan06, Hotung experienced the largest recovery in value, probably due to the speculative interests and hope of a better year ahead on the back of rising Taiwan Index. Looking to further unload Sunray at 39 cts, Hotung at above 15 cts and ASJ at 24 cts. The tide may be falling soon. STI @ 2388.91.
