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.

Heng Huat: RM15mil PATAMI On Track

Heng Huat FY15Q2 Financial Results

HHG (RM mil)	FY15Q2	FY15Q1	FY14Q4	FY14Q3	FY14Q2
Revenue	26.6	26.5	23.2	23.1	24.1
Gross Profit	12.9	10.6	8.8	10.4	10.4
Gross%	48.5	40.0	37.9	45.0	43.2
PBT	6.2	3.5	3.5	2.3	3.7
PBT%	23.3	13.2	15.1	9.9	15.2
PATAMI	5.0	2.9	3.4	1.2	2.7
Biomass Rev	21.8	19.9	18.1	18.6	19.7
Mattress Rev	6.6	12.6	9.8	9.1	9.2
Biomass OP	6.4	3.6	3.6	4.3	4.2
Mattress OP	0.04	0.3	-0.1	-0.1	-0.2
Total Equity	75.1	70.0	68.3	64.8	43.1
Total Assets	117.4	114.3	109.8	110.5	95.3
Trade Receivables	30.1	26.7	22.3	19.7	21.4
Inventories	5.8	4.8	5.9	6.3	5.4
Cash	13.7	14.1	15.2	18.8	2.6
Total Liabilities	37.1	39.9	36.8	42.2	49
Trade Payables	11.8	13.1	11.2	9.2	11.4
ST Borrowings	13.9	11.4	9.6	12.1	15.5
LT Borrowings	10.5	14.3	15.3	19.0	20.5
Net Cash Flow	-1.6	-1.2	13.0	16.6	0.4
CFOperation	7.3	4.9	13.5	8.7	6.5
Depreciation	3.5	1.6	5.9	4.3	2.8
CFInvestment	-4.3	-4.3	-7.7	-7.5	-5.1
Purchase PPE	4.5	4.5	7.1	7.1	4.7
CFFinancing	-4.6	-1.7	7.3	15.5	-1.1
FCF	2.8	0.4	6.4	1.6	1.8
EPS	2.45	1.42	1.67	0.64	1.69
NAS	0.36	0.34	0.38	0.38	0.27
D/E Ratio	0.14	0.17	0.14	0.19	0.77

Heng Huat's FY15Q2's revenue is marginally higher than FY15Q1 but PBT increases by an astonishing 77%, thanks to vast improvement in profit margin.

It is a record-breaking quarter for this relatively new company proposing to be transferred to main board.

The higher profit margin is contributed by higher average selling price of its biomass materials and lower raw material cost.

However, revenue from mattress division falls quite significantly but still able to stay profitable.

At first half of FY15, revenue increases 17% to RM53mil, while PATAMI improves 39% to RM7.95mil compared to 1H14.

This means that the RM15mil PATAMI the management guided earlier is highly achievable.

Heng Huat has recently completed the acquisition of land in Gua Musang to build a new plant which is expected to be operational in Q2 of 2016.

The new plant will increase its oil palm EFB fibre production lines from 20 to 27, with annual capacity rising from 100.5k tonnes to 135k tonnes.

The capacity expansion is mainly to cater for rising China demand, as well as new markets in Australia, South Korea and Japan.

Besides, the construction of its biomass power plant is expected to be completed in Q3 of 2016.

After bonus issue, Heng Huat's ordinary shares have increased to 308.7mil. 

If its PATAMI can reach RM15mil in FY15, projected EPS will be 4.86sen.

At current share price of 37.5sen, it is trading at forward PE of 7.7x.

As about 45% of its sales are to China, current devaluation of RMB and fear of China slow down have already affected Heng Huat's share price negatively.

Its share price has fallen 19% from 45.5sen since its bonus issue ex-ed in early July.

Since biomass market is forecasted to grow further, and Heng Huat is still showing signs of growth, probably I will continue to hold its shares despite China concern.

Can Heng Huat Achieve RM15mil PATAMI In FY15?

Heng Huat FY15Q1 Financial Result

HHG (RM mil)	FY15Q1	FY14Q4	FY14Q3	FY14Q2	FY14Q1
Revenue	26.5	23.2	23.1	24.1	21.3
Gross Profit	10.6	8.8	10.4	10.4	9.7
Gross%	40.0	37.9	45.0	43.2	45.5
PBT	3.5	3.5	2.3	3.7	3.8
PBT%	13.2	15.1	9.9	15.2	17.6
PATAMI	2.9	3.4	1.2	2.7	3.0
Biomass Rev	19.9	18.1	18.6	19.7	16.7
Mattress Rev	12.6	9.8	9.1	9.2	9.1
Biomass OP	3.6	3.6	4.3	4.2	3.5
Mattress OP	0.3	-0.1	-0.1	-0.2	0.3
Total Equity	70.0	68.3	64.8	43.1	40.4
Total Assets	114.3	109.8	110.5	95.3	90.5
Trade Receivables	26.7	22.3	19.7	21.4	19.2
Inventories	4.8	5.9	6.3	5.4	4.6
Cash	14.1	15.2	18.8	2.6	2.4
Total Liabilities	39.9	36.8	42.2	49	47.4
Trade Payables	13.1	11.2	9.2	11.4	9.4
ST Borrowings	11.4	9.6	12.1	15.5	15.3
LT Borrowings	14.3	15.3	19.0	20.5	21.4
Net Cash Flow	-1.2	13.0	16.6	0.4	0.2
Operation	4.9	13.5	8.7	6.5	2.6
Investment	-4.3	-7.7	-7.5	-5.1	-1.8
Financing	-1.7	7.3	15.5	-1.1	-0.7
Dividend paid	1.0	0.0	0.0	0.0	0.0
EPS	1.42	1.67	0.64	1.69	1.91
NAS	0.34	0.38	0.38	0.27	0.25
D/E Ratio	0.17	0.14	0.19	0.77	0.85

Due to increase average selling price of its biomass materials & related products, Heng Huat's FY15Q1 revenue improves 24.4% compared to corresponding quarter of FY14Q1 last year.

However, because of higher raw material price as well, gross profit increases by only 9.3%. Gross profit margin reduces from 45.5% to 40.0% in the same period.

Compared QoQ to preceding quarter of FY14Q4, revenue increases 14.2% but PBT is flat mainly due to higher selling and admin cost (annual increment and higher bonus).

Quarterly revenue from both biomass & mattress divisions reach record high but operating profits stay flat. Revenue from mattress division actually shows a good growth of 28% QoQ.

HH not only sells those super hard mattress made from biomass fiber, it also sells spring mattress. So it might benefit from accelerated completion of new properties in the country.

Other than that, balance sheet and cash flow remain fairly healthy.

       Fibre Star Pocket Spring Mattress

HH has paid its first ever interim dividend of 0.5sen (RM1.03mil) for its FY15 earlier this year. There is no dividend for FY14. There might be another round of dividend for FY15.

Its share price has rallied from 50sen to above 70sen level since the start of Apr15. I actually do not expect it to climb so fast.

The surge in share price was fueled by an article in The Edge on 27 Apr in which Heng Huat's executive director "hinted" that the company can achieve revenue and net profit of RM100mil (+10%) and RM15mil (+20%) respectively in its FY15.

So, latest Q1 PATAMI of RM2.9mil must have disappointed many investors and speculators thus its share price drops significantly.

Besides, Heng Huat also proposed bonus issue of 1:2 and transfer to main board as expected. These proposals have been submitted to Bursa Malaysia for approval.

Is it a trend now to give bonus issues soon after listing?

       "We got annual salary increment and higher bonus. How about you?"

Export sales make up 65-70% of HH's sales and China alone takes up 45%. Other countries are South Korea, Australia etc.

Director mentioned that strengthening of China RMB against RM will benefit HH. Its Forex gain in Q1 is just RM161,000.

Low crude oil price and slow down in China's growth could be concerns to HH. It's good that HH can explore new markets esp in Europe.

Using the company's forecast RM15mil PATAMI as a guide, target FY15 EPS for HH will be 72.9sen. So my target price will be 73sen base on PE ratio 10x.

Heng Huat: Slowly But Surely?

HHGroup FY14Q4 Financial Result

HHG (RM mil)	FY14Q4	FY14Q3	FY14Q2	FY14Q1	FY13Q4
Revenue	23.2	23.1	24.1	21.3	23.1
Gross Profit	8.8	10.4	10.4	9.7	9.5
Gross%	37.9	45.0	43.2	45.5	41.1
PBT	3.5	2.3	3.7	3.8	3.5
PBT%	15.1	9.9	15.2	17.6	15.2
PATAMI	3.4	1.2	2.7	3.0	2.4
Biomass Rev	18.1	18.6	19.7	16.7	18.2
Mattress Rev	9.8	9.1	9.2	9.1	10.1
Biomass OP	3.6	4.3	4.2	3.5	3.9
Mattress OP	-0.1	-0.1	-0.2	0.3	0.2
Total Equity	68.3	64.8	43.1	40.4	37.3
Total Assets	109.8	110.5	95.3	90.5	89.0
Trade Receivables	22.3	19.7	21.4	19.2	19.4
Inventories	5.9	6.3	5.4	4.6	4.2
Cash	15.2	18.8	2.6	2.4	1.4
Total Liabilities	36.8	42.2	49	47.4	49.1
Trade Payables	11.2	9.2	11.4	9.4	11.2
ST Borrowings	9.6	12.1	15.5	15.3	13.8
LT Borrowings	15.3	19.0	20.5	21.4	23.0
Net Cash Flow	13.0	16.6	0.4	0.2	0.3
Operation	13.5	8.7	6.5	2.6	11.3
Investment	-7.7	-7.5	-5.1	-1.8	-7.7
Financing	7.3	15.5	-1.1	-0.7	-3.2
EPS	1.67	0.64	1.69	1.91	1.52
NAS	0.38	0.38	0.27	0.25	0.23
D/E Ratio	0.14	0.19	0.77	0.85	0.95

Heng Huat's revenue in FY14Q4 is rather flat. Gross profit margin drops due to higher raw material price for biomass segment but lower admin & distribution expenses make the PBT comparable to previous quarters.

Excluding the listing expense of RM1.87mil in Q3, FY14Q3 PBT is actually RM4.2mil. So current Q4 PBT of RM3.5mil is a bit of disappointment to me.

Tax income registered in Q4 gives Heng Huat its record high quarterly PATAMI of RM3.4mil.

HHG (RM mil)	FY14	FY13
Revenue	91.7	73.7
Revenue growth %	24.6
Gross Profit	39.2	32.0
Gross%	42.7	43.4
PBT	13.2	11.4
PBT%	14.4	15.5
PATAMI	10.4	9.7
PATAMI growth %	7.2
EPS	5.79	6.11
NTA	0.38	0.23

Anyway, full year FY14 result is still commendable with revenue grows 24.6% and PATAMI grows 7.2%.

The better results are contributed by better demand and selling price for its biomass products esp oil palm EFB fiber from China.

Lesser growth in profit is due to decrease in product margin, higher transportation cost and the one-off listing expense mentioned earlier.

Tax paid in FY14 is just 3%, due to many of its products granted pioneer status with tax exemption.

Net debt/equity ratio improves substantially after IPO and further drops to 0.14x in the end of FY14.

Heng Huat latest geotextile product palm fiber mats are fully sold since launched. It currently only has one production line with production capacity of 100 pieces per month. It plans to set up another line in Q1 of FY15.

The palm fiber mats can be used in construction and plantation sector to prevent soil erosion. Heng Huat highlighted that plantation players can enjoy a production cost saving of more than 2 times by using the palm fiber mats.

       Palm Fiber Mat

Last year Heng Huat bought land in Gua Musang to build a new factory that will increase its oil palm fiber production capacity. Its construction will only start in Q3 of 2015.

I think Heng Huat still has room to grow, albeit slow. 

If not because of the one-off listing expense, Heng Huat should be able to achieve PATAMI of RM12mil in FY14. 

With total shares of 205.8mil, EPS will be 5.8sen. So I'll keep my target price at 58sen base on PE of 10x.

Heng Huat might be one of the few companies in ACE market who shows good profitability and awaiting to be transferred to main board.