Brilliant Circle Holdings 贵联控股: Company Analysis Part II

Laminated papers segment is considered part of the cigarette packaging's side business. This segment produces environmental safe composite transfer paper and aluminium foil used for package of cigarette, food and wine boxes. Operating profit margin has been consistently above 20%, but revenue contribution to the group is not significant. 

Book printing services segment is the previous core business of the group, but the place was taken by the cigarette packaging division after the consolidation. This segment was not good all this while. Revenue and Operating profit margin getting lower and lower due to stiff competition from the foreign companies. I guess that is the reason why the group disposed its book printing business in Dec 2014 for HKD109 million and focus on its core business. 

The revenue and operating profit margin for the cigarette packaging has been improving after consolidated into the group. The growth rate of its revenue is good and almost hit double in 3-year time as a result of acquisition and organic growth 

The key men of the group are them, especially Mr Tsoi Tak who is the founder and chairman of the group while Mr David Cai is his son and probably the man who will continue to drive growth for the group in future. Mr Qin and Mr Kiong is the COO and Executive director of the group, taking care of the operation and marketing of the group respectively. 

Mr Tsoi Tak owning 51% shareholder stake of the group while his son, Mr David Cai taking 5.9% direct ownership. Mr Kiong taking very negligible stake in the group while no ownership for Mr Qin. 

Mr Tsoi Tak took a hopping total HKD24 million of emoluments at which half of it was incentive performance bonus in FY2013. 

For the first half FY2014, the performance of the group dropped as a result of slowed orders from the high tier market as they stockpiled around the end of 2013. To make it worst, administrative expenses increased tremendously due to increase in director remuneration, staff welfare and entertainment expenses. So, the management team and employees were taking higher pay when the company's performance was dropping :( 

As noted in the announcement, the group has strategically expanded its post press services which in selected brands can offer higher profitability and lower working capital commitment. 

Balance sheet improved a bit with borrowings reduced. So, expected lower finance costs moving forward. 

When looking at the segment reporting, it's obvious that the other cause for the performance drop was due to the loss making of the book printing business segment although it's not that significant in terms of profit contribution. The group made a decision to dispose this division last December. 

Apart from that, it's noted that the operating profit margin of the cigarette packaging also dropped to 35%. It's similar case for the laminated papers division. 

The group made a couple of corporate announcement in this few months. 

First, the group acquired the 40% it does not owned in Giant Sino in Nov 2014 for HKD82.4 millions. Thus moving forward, the profit will be fully consolidated into the group's bottom line. 

In Jan 2015, Masterwork Machinery (Manufacturers of printing equipment) has entered into framework agreements to acquire 251 millions shares of the group which represent around 16.9%. I think there will be certain synergy effect between the equipment manufacturer and the group as it may provide equipment with better and higher technology to the group in future. 

In a separate case in Jan 2015, a third party group also tend to acquire 103 millions shares of the group which represent 6.95%. Not sure about this as the info is quite limited. 

The cigarette packaging market is generally a capital intensive industry which require large amount of investment in both plant and equipment. Furthermore, anti counterfeit technology and environmental protection technology set up a high entry barrier for new entrants in cigarette packaging industry.

Both AMVIG and Brilliant Circle also having a hard time this year and both also will release their full year result soon. 

Brilliant Circle Holdings 贵联控股: Company Analysis Part I

After had a study on AMVIG Holding, next of course is its competitor, Brilliant Circle Holding (Stock code:1008). The group previously name CT Holding which principally involved in book printing services. 

In 2010, the group acquired Brilliant Circle from Tsoi Tak who is also the chairman of the board as well as the controlling shareholder of the company for HKD2.4 billion with issuance of 480million new shares at HKD5 each. 

The group later changed its name to Brilliant Circle from CT Holding earlier. The acquisition is considered as a business combination under common control as Mr Tsoi Tak is the ultimate controlling party of both companies.

The Group now consists of seven manufacturing entities, five of which have been awarded “National High-tech Enterprise” recognitions, and one corporate research and development centre.

The Group and its associated company’s annual production capacities of cigarette package printing and transfer paper are approximately 5.6 million cases and 4,000 MT

The Group was also among the first to obtain China’s “Green Printing Enterprise” qualification.  

In 2011, China Packaging Federation granted the Group the title of “China Tobacco Packaging Research and Development Center”, responsible for undertaking major research topics for the industry.

So far, the Group and its associated company have 124 national patents, 2 provincial class corporate research and development centers, 2 corporate engineering centers and 2 national class testing laboratories.

Ever since the group acquired the cigarette packaging business, the respective segment become the core and breadwinner of the group. Revenue and net profit also increased tremendously. However, the growth is not that splendid for the cigarette packaging segment.

Operating profit margin and net profit margin also around the same with above 20%. The group's associate is its 35% stake in Changde Goldroc Rotogravure Printing which is also involved in cigarette printing packaging service. The associate helps to contribute certain amount of profits every year.

Besides, in June 2012, the group acquired 60% stake in Giant Sino Investments to hold majority ownership in YangFeng Printing & Packaging which also involved in cigarette packaging.

60% of the cost comes from the pulp which Chile is one of the world largest pulp producers. Gross profit margin for the past few years was quite stable at around 30%.

The group was in net borrowing position in its latest financial year with net gearing ratio of 0.23 as the group took up a big amount of borrowings in FY2013 for refinancing existing indebtedness and payment to non-controlling interests of one of its subsidiaries.

Interest payment to operating profit ratio is around 20% which is not a very healthy position. I wish the group able to reduce it below 15% or even 10% to increase it profit margin.

Current ratio is more than 1.

Shareholders' equity and total borrowings contributed around 57% and 24% of total assets respectively.

In terms of cash flow, it's similar to AMVIG holding as the group does not need much capex for growth every year. The group averagely spent less than 5% of its sales on capex yearly. Thus the free cash flow has been positive, stable and increasing throughout the years.

Operating cash flow margin averagely more than 25% for the past few years. FCF/Sales and FCF/Invested Capital are both impressive at >10%.

The quality of its earning is quite good as the net cash flow from operation / net profit ratio has been more than one throughout the years.

Overall, the group's management on its cash flow is quite good.

The cash conversion cycle improved since the acquisition of the cigarette packaging business. It may not be as good as AMVIG but still quite good at around two to three months period. 

In terms of return, its ROE is averagely around 20% while its ROIC had a drop in FY2013 due to increased invested capital from borrowings and smaller growth from its operating profit. 

As usual, the part I analysis consist of the brief introduction followed by the financial statement, will evaluate more on next post.