Thong Guan: A Bad Quarter?

I have been monitoring Thong Guan Industries since the drop of crude oil price as the lower oil price may indirectly helps a bit on its profit margin for the stretch film division. The group announced a poor Q3 performance 3 months ago. 

And the group again announced a poor report card for its 4th quarter. 

At first glance, it looked bad with a negative number at the bottom line. Very bad indeed. Nobody likes to see 

In fact, the gross profit margin improved a bit from 10% to 10.42%. 

However, there is no more good news other than that. Distribution and administrative expenses also increased. 

The critical point is the Other Expenses of around RM10 mils that caused this sudden drop in net profit. 

Looking at the operating activities, there was an impairment loss on receivables for an amount of RM5.5 million. The management made a decision that they probably could not collect back the amount from their customer already and made an immediate expense.

In addition to that, there was also realised and unrealised foreign exchange loss with total amount of around RM4.1 million. Not sure where it came from, but 85% of the group's total borrowings are denominating in USD currency. The strong USD currency for the last few months hurt their pocket a bit. Little bit lazy to check the currency of its trade receivable and payable. 

So both elements contributed to the high amount of Other Expenses. 

In terms of balance sheet, one must note that the inventory increased almost 50% compare to last year. 

As of its cash flow, operating cash flow was negative mainly due to increase amount of inventory. The group need to take up additional loan on top of the issuance of ICULS to finance its capex as well as covered its negative operating cash flow.  

Management mentioned a lot of work has been in progress, installation of nano thin stretch film machines, 4 additional lines of PVC food wrap machines, a state of art blown film lines and R&D research centre. But these things need time. 

With the increased in invested capital with the issuance of ICULS and conversion of warrants in future, can the management move the company forward and achieve better return to its shareholders? 

Perhaps no more impairment on trade receivable is a good start. Oh ya, management should explain in the report why there was such a case occurred and what is the preventive action being taken.