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Friday, December 19, 2014

Tong Herr Resources: Another Fastener Player

After studied Chin Well Berhad, of course the next will be the player in the same industry, Tong Heer Resources Berhad.

Tong Heer Resources Berhad, or namely TONG group is an international stainless steel fastener including nuts, bolts and screws with several manufacturing bases in Malaysia, Thailand and China. Tong Heer was established by the Tong group in 1989 (Malaysia's factory) and 2005 (Thailand's factory) for manufacturing stainless steel fasteners. Tong Heer's products are widely used in many different industries.

Same as Chin Well group, performance of Tong Heer Resources group had been in roller coaster ride too with fluctuating profit margins and still not yet recover the profit recorded before 2008 financial crisis.

The operating and net profit margin are lower than 10% for the past three years.
Drops in performance of the group in FY2012 was due to low demand and EU investigation of anti-circumvention during the year.

In 2009, the group tried to diversify into other business segment by subscribed 37.04% equity interest in Fuco International Ltd at USD20mils, which involved in steel billet manufacturing in Vietnam. However up until FY2013, the group's associates, Fuco Steel in Vietnam is still in red.

The group is not in net cash position with net gearing ratio of 0.07 which is manageable. Majority of the borrowings are denominated in USD dollar with effective rate range from 0.73% to 3.8%.

In Aug 2010, the group also diversified into other metal business by acquired 51% equity interest in Metech Aluminium Industries (changed name to Tong Heer Aluminium) for RM35mils, which involved in aluminum extrusion in Penang and Tong Heer (Thai) also acquired a land situated in Pinthong Industrial Estate for business expansion.

All these corporate actions caused the group took up some loan to finance the expenditures.

The group’s cash flow was quite bumpy but the management able to control its capex spent nicely. Other than FY2006 & 2010, the group managed to record positive free cash flow throughout the years. 

Bear in mind that I didn’t not include acquisition on new subsidiary or associates into capex calculation.

It’s same as Chin Well group as the group maintained a high inventory turnover that caused high cash conversion cycle but its trade receivables turnover is better in comparison.

ROE and ROIC are so bad that recorded well below 10% which in theory, it's destroying shareholder's value. Low profit margin, low net profit and high capital required contributed to this scenario unless the performance improved and get back to the old days before FY2008. 

The group only started to report segment breakdown after it diversified into aluminium extrusion business. Fasteners segment is still the core business of the group, contributed more to the group’s revenue and profit. Both segments also record PBIT profit margin below 10% but Aluminium extrusion segment showed slightly better. Margin for fasteners is quite bumpy too.

Unlike Chin Well group who’s close to 60% of its sales come from European countries, Tong Heer Resources’s sales are quite equally diversified into different countries which is a good point. 

When you read through the latest annual report, you will come across the Non-controlling interest part which shows the basic data of its 51% owned Tong Heer Aluminium and 50.01% owned Tong Heer (Thailand).

Increase revenue but with lower net profit recorded for both subsidiaries compared to previous year. This is not encouraging especially the Thailand plant with lower profit margin and negative operating cash flow.

Perhaps due to politic instability in Thailand last year? Higher labour cost? 

Another thing investors who wish to invest in Tong Heer group need to take a look at its currency risk profile. The group is quite exposed to USD currency based on the currency risk explanation as stated in the latest annual report. 

The group is quite sensitive to USD currency. The weakening of both functional currency of Ringgit Malaysia and Thai Baht against USD will have immerse impact on the group's performance. 

And you should know how strong the USD currently is recently. I not sure the amount stated is net profit or operating profit or just revenue. If worst case the amount stated is on its net profit, the impact of appreciation of USD against RM & Thai Baht on the group's net profit is quite huge (RM3-4 mils) given that the group only chalked up around RM17 mils net profit in FY2013. 

Do take note of this

Similar to Chin Well group, the fasteners industry enjoys a tremendous turnaround this year. Management mentioned that improved margin ( higher selling price as well as lower cost of goods) and higher sales from exports helped the group to record awesome results compared to last year. 

And dividend too~ 6 cents interim compared to last full year of 5 cents. Any more to come?

Seems like it's going to be a good year for the fastener industry. 

Mr Tsai Yi Ting (Aged 24), Managing Director is the son of Mr Tsai Ming Ti who is the Chairman of the group currently. 

He was appointed as Assistant to Managing Director in Jan 2010 at the aged of 20 ( Hmmm, I just entered my first year of uni life at that age ). 

He was appointed as Managing Director on Aug 2012. at the aged of 22. ( Well, I still not yet graduated and still playing dota at that age ).

Well, since the founder is still working in the company and has at least 10 years more to guide the Junior Tsai. It should be no problem for handover. 

1 comment:

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