Geshen: Gets Double Boost

Geshen is primarily a plastic injection molding player like the famous high-flying VS Industry & SKP Resources. It was incorporated in 1995 and is based in Johor Bahru.

Base on FY14 full year net profit of RM2.56mil, it is currently traded at actual PE ratio of 18x at recent average share price of 58sen which is not attractive at all.

Its injection molding business seems to hit the bottle neck in which its annual revenue always stays at around RM80mil with little and fluctuating net profit since year 2005, except lower turnover and net loss during economy crisis in 2008/09.

Its management took some steps to grow the group by diversifying into cosmetic & skin care business in 2010, and then into manufacturing of fiber products (like Heng Huat) since 2012.

Unfortunately, these two new business ventures do not live up to expectation and incur loss without fail to the group since operation.

Here comes the first BOOST.

Geshen has disposed these 2 loss-making subsidiaries. The disposal was first announced on 19th Dec 2014 and was announced as completed on 2nd Mac 2015.

How will the disposal affect Geshen?

From Geshen's latest FY14Q4 financial report, it is mentioned that these 2 subsidiaries registered total loss of RM4.283mil in the whole FY14 (red box below).

The PBT & PAT of its continuing operation (ie. plastic injection molding) in full FY14 is RM8.733mil & RM6.825mil respectively.

However, there is a one-off pre-tax gain from disposal of subsidiaries amounting to RM1.194mil in Q4.

After deducting this special gain, its plastic segment PBT should be RM7.539mil, and PAT should be RM5.9mil base on similar 21.8% tax rate.

If its plastic business can maintain its performance and reports similar RM5.9mil net profit in FY15, then its EPS will be 7.38sen (80mil shares). 

So the projected PE ratio for FY15 will be 7.8x.

Nevertheless, there is a significant drop in revenue of FY14Q4 due to reduced order. This remains a concern.

The second BOOST is its proposed acquisition of its peer Polyplas which does exactly the same thing as it does.

Geshen will acquire 75% of Polyplas for RM33.8mil which will be paid by internal fund and issuance of 30 million Redeemable Convertible Preference Shares (RCPS) at 60sen each which are convertible into ordinary shares within 5 years.

The RCPS will raise RM18mil and its holders are entitled to 5.5% dividend per annum. 

Geshen has the option to acquire the remaining 25% of Polyplas in the future.

How good is this Polyplas?

Polyplas is incorporated in 1988 and is based in Bukit Mertajam Penang.

Though Polyplas is only half the size of Geshen in term of annual turnover, it seems to me like Polyplas is a more exciting company for reasons below:

Polyplas is growing

Compared to Geshen's stagnant revenue, Polyplas's revenue improved significantly by 39% YoY in its FY14 (ended Oct14). 

However, we don't have long enough data to ascertain that it is really a consistent growth, as revenue of contract manufacturers can fluctuate a lot. 

Anyway, recent growth is still a good sign. It is even constructing a new factory recently to increase its production and warehouse space. It is expected to be completed in Aug 2015.

Polyplas FY14 production capacity utilization rate is at approximately 52% based on operating hours.

The utilization rates based on various machine tonnage are as follows:

There are different machine tonnage which caters for different customers' products so it is almost impossible to utilize all the machines at one time.

Anyway, it is reported by analyst that SKPRes has current utilization rate of 75-85%, from 60% during its disappointing time in calendar year 2013. It has constructed new factory that will increase its capacity by another 75%!

       Polyplas @ Bukit Minyak

Polyplas has much better profit & margin

Despite lower revenue by half in FY14, Polyplas manage to produce better net profit than Geshen. 

This is because of its unbelievably high net profit margin of 18% in FY14 despite an effective tax rate of 22.6%.

Report says that this is achieved through better sales and production efficiency, without any one-off special gain.

Polyplas has more diversified business & customers

Geshen mainly involved in plastic injection molding for Electrical & Electronics sector, primarily in audio-visual segment.

Apart from E&E sector, Polyplas has capability and business in manufacturing products for medical sector which might be the next investment theme.

       Medical products by Polyplas

Polyplas derives 55% of its revenue from export sales to Asia, Europe and US, while 85% of its raw materials/components are sourced locally in FY14.

       Marked sales improvement across the board


There should be a mistake in the table above in FY14 which I think sales to Hungary should be close to zero. However, overall sales to Europe still increases by a good 33% YoY.

Geshen's has largely Japanese customers but Polyplas has wider geographical presence and strangely, there is no Japan in the list.

Polyplas's main export country in FY14 is US, which makes up about 37% of its export followed by Europe (32%) and Asia (31%). So, acquisition of Polyplas will give Geshen a good global exposure straight away.

US economy is recovering while Europe and Japan are busy printing money now. Will this give Geshen another boost?

Polyplas has much better official website

Though this is half joke but I have a tendency to judge a company by looking at its website, though I know that it's wrong.

Both VS and SKPRes also have lousy website design but they are good companies.

You can go to Geshen and Polyplas official website and see for yourself.

Geshen will acquire 75% of Polyplas. If Polyplas can achieve similar net profit of RM7.9mil in FY15, then Geshen will get RM5.9mil.

If we add together projected net profit of Geshen (RM5.9mil) and 75% profit of Polyplas (RM5.9mil), it will be RM11.8mil.

After the corporate exercise, Geshen's outstanding shares will remain at 80 million as long as no RCPS are converted into ordinary shares. So, guesstimated FY15 EPS for Geshen will be 14.8sen.

After all the RCPS are converted, Geshen's shares base will increase to 110 million. So, diluted guesstimated EPS will be 10.7sen.

Please bear in mind that even though Polyplas produces a great profit margin and financial result for FY14, it does not mean that FY15 cannot be poorer.

Anyway, sooner or later Geshen will acquire the remaining 25% shares of Polyplas. If Polyplas remains profitable, then it will add a significant amount of profit to Geshen in the future.

Geshen does not acquire 100% Polyplas's shares at one go as it wants Polyplas's director and founder Narinder Singh to stay committed to lead the company.

Mr Narinder is a real entrepreneur and almost single-handedly leads Polyplas. His leadership was just recognized last year and it remains a mystery why he decided to sell his company.

Overall, at below 60sen per share, Geshen looks undervalued after all those corporate exercises which is expected to be completed in the 2nd quarter of 2015.

Its RCPS is set at 60sen per share which is higher than current share price of below 60sen!

Balance sheet and cash flow of Geshen is good and it currently has net cash of RM10.8mil. It needs RM15.8mil cash to acquire 75% of Polyplas so apparently no more net cash after this.

Geshen shares liquidity is very low, with merely 80 million paid-up shares in which only 25.96% are in public's hands and the top 30 shareholders have already taken up 91.6% of the company.

Earlier this year, its public shareholding spread of 22.83% was not compliant with listing rule so its major shareholders have to dispose 2.5mil shares in Feb15 to lift the figure to 25.96%.

When I first notice Geshen through an article by Icon8888 in i3investor, I actually have the same excitement as when I first discovered Latitude Tree. 

Both have operation in Vietnam and both are going to acquire something that will boost their earnings significantly.

Latitude produced superb organic growth with magnificent quarterly results while Geshen is going to get rid of its loss-making subsidiaries.

However, Latitude is one of the market leader in its industry but Geshen is not. Latitude's revenue is growing all these years but it is not the case with Geshen.

Plastic injection molding is a highly competitive industry with over 1,500 manufacturers in the country.

VS Industry and SKP Resources/Tecnic are clear market leaders. Other listed players include LCTH, HIL Industries, Kumpulan H&L, Luster etc.

Once these contract manufacturers get a fat contract to manufacture and assemble something new, their revenue and profit will surge. This is shown in VS (Keurig coffee machines) & SKPRes (Dyson vacuum cleaner). 

Geshen is clearly still not in that league but it has been trying to grow the company through diversification twice since 5 years ago. Hopefully it's third time lucky for Geshen.

SKPRes is trading at high PE of over 15x now but it seems to have strong growth and capacity expansion ahead. Otherwise I think fair PE for this industry should be 10x.

For Geshen, it might only command a PE of 8x the most. I'll use my FY15 forecast diluted EPS of 10.7sen to set my target price. Thus my target price for Geshen will be 86sen.

It's better to be more conservative as Geshen's FY14Q4 revenue drops 35% QoQ, and Polyplas might not sustain its good performance in FY14.

Though disposal gain of its subsidiaries are consolidated into its FY14Q4 report which ended in Dec14, but the completion of disposal was only announced on 2nd Mac 2015. So I'm not sure whether the loss-making subsidiaries results in Jan-Feb15 will still be included in its FY15Q1 or not.

With wider customer base, inclusion of Polyplas management team and diversification into medical products, hopefully Geshen can achieve significant organic growth which it fails to achieve in the past 10 years.