Hongwei Technologies Limited (Hongwei) is engaged in the manufacture and sale of polyester differential fibers primarily to yarn and textile manufacturers located in the southern parts of China.
Hongwei has a customer base of more than 600 customers. It also provides customized services to its customers, such as product testing, elasticity tuning and thickness fitting.
Hongwei’s principal products are synthetic cotton (SC or formerly known as polyester padding cotton), polyester differential pre-oriented yarn (POY) and drawn and textured Yarn (DTY).
SC is used as a substitute for natural cotton in a range of applications from home use products to industrial packaging. POY is used to manufacture products, such as DTY and air translated yarn (ATY), that are made into a variety of regenerated fabrics.
DTY is used for weaving and knitting, and is suitable for producing clothing fabrics, bedding articles and accoutrement, such as sofa cloth and interior decoration lining for automobile.
Results are out for Hong Wei Tech:
- 41% Rise in Revenues.The main growth driver is the emphasis in synthetic cotton which saw an increase of 80%.
- Net profit increase by 30%.
- Net Profit margin fell to 19% from 21%. A positive note is that the company has handled the increase in raw materials scenario very well.
- Interest expense although low, saw a surge due to the increase in short term borrowings.
- Net operating profit after tax saw an improvement from 51 mil to 68 mil.
- Capital spending was less dropping from 69 mil to 36 mil.
- Price to book at 2.18 times
- Dividend payout ratio is 27%
The results release shows a well run company on the surface. However, i do have one gripe: A cash flow of RMB 62mil should easily pay for a 39 mil capital spending and a 14 mil dividend. Are the company doing a right thing by placing out 57mil worth of new shares?
Total Cash now is a massive RMB 132 million. At the price of SGD 30.5 cts, this is 39% of market cap!
If we remove this cash, the operating cashflow return on invested capital(operating cashflow/(total assets – cash – current liabilities)) is an astounding 107%. up from 32%. I would really be interested in this years full year result to see if a synethtic yarn business can really navigate inflation well.
Here is something that i try with. Based on current operating cashflow of RMB 62 mil, If FY 2008 they do not grow (0% growth rate) and WACC at double at 20%, the future cashflow to perpetual would still be 141% of the current share price.
Heres another one. The cash on hand is 132 mil. The market cap is 332mil. No long term debts. So the enterprise value is 244 mil after taking away the cash and adding short term interest bearing debt. If you divide 244 by 62 mil, which is the operating cashflow, you get 4.
What it means that if the cashflow doesn’t grow, the share value contains only 4 years worth of cashflow generated at zero growth. I’m still exploring whether i got it wrong here, cause it looks really undervalued based on this.
Operating Cashflow yield is 20%. Pretty good, if the company doesn’t buy capital goods, which is not possible.
At my buy price of 20.5 cents, the dividend yield is 7%. On a payout of 27% of net income, thats pretty darn good. Hong wei still have 73% to work with to grow.
I think this set of results isn’t that bad. However, a note of caution is that this is a volatile and very competitive industry. If you earn good margins, you can expect competition. This is even more so since fixed costs isn’t there to provide barriers to entry, no proprietary technology to keep competitors out and inflation expected to be rampant.
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