AMVIG Holdings 澳科控股: Company Analysis Part II

Laminated paper & laser film segment produces the raw materials needed for the cigarette packaging printing. Its contribution in terms of revenue and operating profit to the group is quite small. 

Thus, the breadwinner is still the cigarette package printing segment. One thing to note is that the declining trend of its profit margin as a result of the tendering system implemented by the tobacco group since few years ago while revenue kept going up albeit a dropped in year 2010 after disposal of Brilliant Circle group. 

Throughout the years, the group able to restructure its product range and keep its focus on high-mid end products which carries higher gross profit margin at around 34% which is almost double of the other 2 lower end products. 

In 2013,72% of the cigarette packaging customers are from High-Mid End class and the top five largest customers accounted for approximately 89% of the total sales. 

The major shareholder is Amcor Limited who is involved in a lot of packaging business for different applications. Back in June 2008, Amcor subscribed 78 mils shares at HKD8.94 each to raise HKD699 millions. Amcor Limited is listed in Australian Stock Exchange Limited,

There are few institutional funds currently owning substantial ownership in the group too. 

On the management side, Mr Chan Sai Wai and Mr Ng Sai Kit who are siblings and also the executive directors of the group taking a significant but not substantial amount of ownership in the group. 

Mr Ge Su who is the CEO of the group taking a mere 0.13% ownership. He has more than 20 years experience in the Chinese tobacco industry. He also participated in many tobacco related projects and also developed a good working relationship with the tobacco monopoly authorities both at central and provincial levels. But why so tiny ownership?

Thus, the total ownership by Amcor Limited, investment funds and management is close to 83%. Not much liquidity in my opinion.

For the half year ended FY2014, the group's performance was not so good. Revenue and net profit also dropped compared to last year. Higher gross profit margin but lower operating profit margin caused its net profit margin dropped too. 

Higher operating expenses was due to weakening of Renminbi against HK dollars that caused an exchange loss of HKD35.2 millions compared to exchange gain of HKD14.7 million last year. By minus out the exchange losses, the core operating cost did reduce little bit from last year. 

Nothing much special on the balance sheet while its cash flow statement only showed the summary. 

Due to the strong balance sheet and cash flow, the group declared 2 special dividends total of HKD37.1 cents on top of usual HKD8.2 cents interim dividends for current year. 

China National Tobacco Corporation (CNTC) is playing an important role for the packaging industry. It's a state-owned manufacturer of tobacco products and also the world's largest manufacturer of tobacco products by revenues. 

Together with State Tobacco Monopoly Administration, they are responsible for the monopoly management of tobacco products and the operation of production, sales, materials, import and export business in relation to tobacco products in PRC.

According to some articles, Marlboro remains the most popular cigarette in the world, but China brands taking 7 of the top 10 brads, including Red Pagoda Mountain and Double Happiness. 

One thing to note is that the cigarette in China is largely opaque monopoly. It blocked competition from Western tobacco markets by limiting imports or domestic production by foreign companies. So, their products are mainly consumed locally and the tobacco industry accounts for about 7 percent of the state's revenue yearly.

The tobacco industry in China seems like a stable industry and it's quite defensive. 

Perhaps, the packaging player for tobacco worth to take a look especially during economic downturn? 

AMVIG Holdings 澳科控股: Company Analysis Part I

AMVIG Holdings Limited which is listed in HKEX, principally involved in the printing of cigarette packages while also manufacture transfer paper and laser film, which are the major raw materials for the cigarette packages. 

The group is one of the leading cigarette packaging printing specialists in PRC and having a market share of approximately 13% according to its website. 

Currently, the group has 6 cigarette packaging printing plants and 2 transfer paper & laser film manufacturing plants spreading across different provinces in PRC. 

In 2005, the world largest packaging group, AMCOR subscribed 80m new shares and became a strategic shareholder with 16.67% equity interest. 

Soon after in 2006, AMCOR injected its cigarette packaging printing business in the PRC & became the single largest shareholder until now and changed its name from "Vision Grande Group Holdings Limited" to "AMVIG Holdings Limited"

The group's strategy all this while focus on dual growth engine, organically and inorganically. The group made numbers of acquisition throughout the early years. Through restructuring and integration, the group at one point was the leader in the industry. 

However since 2010, the tobacco groups had since implement tendering system which affected the profit margin of the packaging industry. This move eliminated many small companies as they could not compete with lower selling price. 

It's obvious that the group able to chalk up higher sales but bad thing is they did it by compromised their profit margin. I believe it will stabilize at one point when all the big boys forming a base line later. Nevertheless, its gross profit margin and net profit margin still above 25% and 10% respectively.

The tax rate of the group is quite high at 36% due to the incurrence of certain non-tax deductible expenses

The group maintains a good balance between its cash on hands and total borrowings to finance its growth. Net gearing ratio less than 15% throughout the years.

The group is in net cash position currently. Current ratio >2 for the past 5 years.

The high amount of borrowings may not be a concern as the interest expense to operating profit ratio is less than 10% and the interest gains from cash balance and dividend from associates are enough to cover.

Good thing about AMVIG is its very strong cash flow. The group needs very low capex each year for organic growth and its operating cash flow is more than enough to cover.

Thus, the group generated high amount of positive free cash flow every year. FCF/Sales and FCF/Invested Capital were good with >5%.

Cash generability is good with net cash flow from operation / net profit ratio is more than one every year.

This explains why the group able to pay big sum of special dividend in year 2012 and 2014 due to its strong free cash flow to return the excess cash to the shareholders.

One of the reasons why its operating cash flow has been so strong is because of its low and occasionally negative cash conversion cycle. The group able to drag its payment to the suppliers while keeping its inventory level low as well as receivables turnover to keep a good working capital management. 

In terms of returns, its average ROE of 10% made it a mediocre company. However, standing at the point of company, its ROIC had been impressive these 2 years with above >30% return. 

Some of the corporate movements for the past few years as below,

Acquired 65% of World Grant in 2006 and establish new Dongguan plant to capture the market share in the southern part in 2007. And in 2008, the group relocated its laser film operation to Dongguan to become a one stop station with both cigarette packaging and film and transfer paper production at one site to improve production efficiency. 

In Oct 2007, the group acquired Brilliant Circle Holdings which is the one of the top 3 cigarette packaging printing groups for HKD1.55 billion. However in Feb 2010, the group disposed Brilliant Circle group back to Mr. Tsoi for HKD2.05 billion due to lower profit margin.

In Oct 2008, the group acquired Hangzhou Weicheng which is one of the top ten tobacco groups for RMB350 millions

In Feb 2010, the group acquire 45% equity stake the group did not own in Famous Plus Group who focus on high end packaging products for RMB670 millions. 

That's for the 3 financial statements and its brief introduction. Will continue on next post.