Friday 4 December 2015

Heng Huat: No "Heng" This Time

Heng Huat FY15Q3 Financial Result

HHG (RM mil) FY15Q3 FY15Q2 FY15Q1 FY14Q4 FY14Q3
Revenue 18.0 26.6 26.5 23.2 23.1
Gross Profit 6.8 12.9 10.6 8.8 10.4
Gross% 37.7 48.5 40.0 37.9 45.0
PBT 3.0 6.2 3.5 3.5 2.3
PBT% 16.7 23.3 13.2 15.1 9.9
PATAMI 2.5 5.0 2.9 3.4 1.2

Biomass Rev 13.7 21.8 19.9 18.1 18.6
Mattress Rev 5.1 6.6 12.6 9.8 9.1
Biomass OP 3.9 6.4 3.6 3.6 4.3
Mattress OP -0.37 0.04 0.3 -0.1 -0.1

Total Equity 77.4 75.1 70.0 68.3 64.8
Total Assets 122.4 117.4 114.3 109.8 110.5
Trade Receivables 31.5 30.1 26.7 22.3 19.7
Inventories 7.4 5.8 4.8 5.9 6.3
Cash 5.0 13.7 14.1 15.2 18.8

Total Liabilities 39.3 37.1 39.9 36.8 42.2
Trade Payables 11.4 11.8 13.1 11.2 9.2
ST Borrowings 15.9 13.9 11.4 9.6 12.1
LT Borrowings 10.7 10.5 14.3 15.3 19.0

Net Cash Flow -10.2 -1.6 -1.2 13.0 16.6
Operation 9.2 7.3 4.9 13.5 8.7
Depreciation 5.4 3.5 1.6 5.9 4.3
Investment -14.9 -4.3 -4.3 -7.7 -7.5
Purchase PPE 15.3 4.5 4.5 7.1 7.1
Financing -4.6 -4.6 -1.7 7.3 15.5

Dividend paid 1.0 1.0 1.0 0.0 0.0

EPS 0.81 2.45 1.42 1.67 0.64
NAS 0.25 0.36 0.34 0.38 0.38
D/E Ratio 0.28 0.14 0.17 0.14 0.19

Heng Huat's latest FY15Q3 was an extremely disappointing one to me.

Revenue dropped rather unexpectedly at 32.3% compared to immediate preceding quarter of FY15Q2, while PATAMI dropped 50% to RM2.5mil.

If not because of RM2.26mil forex gain in this quarter, the result could be even worse.

The management claimed that this was due to lower sales of EFB fibre to China market, due to economic uncertainties in China, and the company lower sales to customers with higher credit risk.

It is good that the company took initiative to lower its credit risk, but this may mean losing more customers or sales.

The poor Q3 result coincided with super bear market in China in which Shanghai Stock Exchange index slumped more than 40% from over 5,000 pts in mid Jun15 to 3,000 pts in Sep15.

With such terrifying sentiment, customers in China might anticipate lower demand and hold back their orders, or they may face some financial difficulty and so delay their payment to Heng Huat.

I'm not sure how long this situation will persist.

If China's stock market performance is to be a guide, then there is a gradual recovery in the 4th quarter of 2015 as Shanghai index has crawled back to 3,500 pts.

Besides, Heng Huat has to lower its average selling price for EFB fibre in this quarter to improve its competitiveness. 

This comes to a bit of surprise to me as I thought Heng Huat is an indisputable leader in EFB fibre.

Gross profit margin has dropped from a remarkable 48.5% a quarter ago to just 37.7%.

Despite all those negatives, I think Heng Huat is still a good company and its operating cash flow remain good.

Its debt increases because RM15.3mil has been spent so far in the purchase of PPE, which should be used for the land purchase and construction of new factory in Gua Musang. 

No matter what, Heng Huat's expansion plan is still on-going, and it will continue to explore new markets.

It will also face no problem to be transferred to main board very soon.

Even though Shanghai stock index dropped a lot recently, it is still at a high level compared to around 2,000 pts in the first half of year 2014.

Will Heng Huat's orders or revenue get straight back to normal around RM25mil in FY15Q4?

I'm actually not too optimistic of that.

However, I think sooner or later it will get back to that level, unless China suddenly goes into a recession. 

If this happens, then not only Heng Huat, every stocks will tumble.


  1. So did your still
    holding hhgroup?

    1. You seldom sell :) You sold HHGroup because China is slowing down and HH started to cut price to compete, correct ?
      I suppose the above out-weight the Q216 new factory expansion and Q316 new biomass power plant.

    2. Ya, you're right. The other reason is because I think its share price has gone up too fast, and the goreng smell is thick in this stock. I'm disappointed with my selling price and regret not selling at least some shares when it was above 80sen which I think is a bit ridiculously high. This is greed...


  2. Besides, Heng Huat has to lower its average selling price for EFB fibre in this quarter to improve its competitiveness.

    This comes to a bit of surprise to me as I thought Heng Huat is an indisputable leader in EFB fibre.

    was shocked to read this as well... @/@

    1. This may show that its competitors are desperate

  3. There's some goreng element in this ah huat, it went up too fast. Luckily I sold some and bring down my average to a comfortable level, think will keep the remaining shares. Hope the coming QRs improve

    1. Mr KYY declared that he invested in this stock too, so should provide some price support :)

    2. I like your way of investment more than kyy... Goreng smell in his picks

  4. Hi BD,

    Thanks for the detailed analysis of Heng Huat latest quarterly result. What do you think about TA ANN ?


    1. I didn't follow Ta Ann since I wrote about it in early 2014. At that time, most of its oil palm trees are matured but it has huge unplanted landbank. I think I need to study it in more detail before giving any comment here.

    2. Hi BD,

      Thanks. Will wait for your comment.


    3. I wish to compare Ta Ann, WTK, JTiasa, but might not be able to do it in near term. I hope you don't wait for my comment to buy/sell, you might miss good opportunities :)

  5. Hi BD, I am eyeing KESM and would like to seek your opinion on this stock.
    When KESM bought over all shares of KESM test in mid'15, I missed the announcement. When Q4FY15 result showed tremendous improvement, I was wondering if it is sustainable. When Q1FY16 good result was announced, I realise it's result should be sustainable for quarters to come. If I use the last 2 Qs result to annualise, the EPS turns out to be 86.2 sen. The fair value would be RM8.62 per share if given PE=10. The upside looks quite attractive.
    The -ve points are :
    I)no other visible catalyst after buying all KESM test shares. Although there are rumours saying corporate exercise and bonus issue may happen, but all those can't be depended on.
    ii) very thin profit margin business
    iii) it's share is illiquid
    iv) it depends on volatile semiconductor and automotive semiconductor industry
    v) the stock price has risen quite a lot lately Thus, I think the downside can also be quite huge. It's stock price fell to ~RM3.50 in mid Aug (ouch..i missed it again).
    In short, both the upside and downside of this stock seem high..
    I got to know that you also studied this stock before, can i know your opinion :) ?

    1. I regret not investing in KESM when I first knew about it earlier. That time my concern is the consistency of its business, besides not familiar with its business. Last 2 Qs results are good, no doubt, though there are some forex gain. Personally I'll give an adjusted quarter EPS of 14sen for it. I really think it's a good buy now, below 5.50.

      I agree with its management that automotive semiconductor has growth potential, as we can see now cars are getting more sophisticated automatic, safety & entertainment features. I think this stock is relatively safe to invest in, unless next few Qs PBT drop back to RM4mil level.

  6. Thanks for sharing your opinion :)