YOCB- Is it normal or something fishy to you?

Yoong Onn Corporation Berhad(Yocb) has released its quarter result ended 31st December 2013. The revenue is quite flattish but  profit before tax was up around 29% compare to last year corresponding quarter. If we compare to immediate preceding quarter, revenue was up 9% and profit before tax was up 37.9%, quite a strong result achieved due to the festive season. Despite the good result, the inventories and receivables in the balance sheet are increasing. If you read my previous post on YOCB, this is the problem that i am worry about. 

As you can see



Quarter result ended 30th September 2013

Quarter result ended 31st December 2013

Since FY2009 until now, the inventories and receivable are growing non-stop.




I have done some calculations to analyse the company's working capital efficiency from FY 2010 to FY 2013.


On inventories

In FY2013, it takes the company roughly 196 days, or 6.5 months in order to clear off all the inventories(roughly 157 days in FY2010) . As you can see, the inventory turnover ratio has became lower and lower year on year. If you take a look on YOCB 2013 annual report, you will find out that most of the inventory held are finished products. I deemed this a bad signal as products will deteriorate. When the inventories piled up too much, it takes up more spaces in the warehouses and incur unnecessary storage cost too.




On receivables

As you can see, it takes the company roughly 65 days to collect back the debts. Please be extra careful when the rate of increase in receivable is greater than the sales growth. When a company has its receivable outgrows its revenue, it might signify that a company is trying to boost up its revenue by selling more goods on credit. It is one of the famous financial shenanigans where a company trying to cheat the investors so that investors believe the company business has turnaround. In YOCB case, i believe the company is doing good and with its strong balance sheet and brand name , there is no reason that it will involve in this financial shenanigan.



On Payable

I am not worry on payable side. Shorten of payable period is a good sign where the company ability to pay off the debts increase, however, lengthen of payable days could signify that the company has  better control of their money by delaying their payment while at the same time bring no adverse effect on their credit reputation.




Cash Conversion Cycle (CCC)

As you can see, it is a clear uptrend on its cash conversion days. It takes around 229 days for YOCB to convert the inventories to sales and collect back the receivables, from around 171 days in FY 2010. The rate of increasing is surprisingly high for me.



Conclusion

It is understandable that the company is trying to grow the business but still I am very much concern of the non-stop growing of receivables and inventories. I have tried to compare the working capital between YOCB and Padini and  found out that Padini is way more efficient that YOCB's. I believe that is because Padini generated most of its revenue through its own outlet while YOCB is more dependent on consignment sales. YOCB should try to increase their working capital efficiency as inventories and receivables cannot be growing forever. At the time i am writing, the share price went up 7 cents to close at 1.22, or market cap of around 200M (11/03/2014) which is the all time high.

Latitude Tree Holdings Berhad - Strong recovery of furniture industry?

Before we talk about Latitude Tree Holdings Berhad (LTHB), let's us understand about the furniture industry. In Bursa, we have few listed furniture companies, Lihen, LTHB, Pohuat, Homeritz and etc. As for LTHB, it exported 90% of furnitures to US and hence, the recovery of US housing market play an important role to determine on LTHB performance. There are few things that i think one should know about

1)The new home sales in US surged 9.6% in January, which is the strongest rate since July 2008. The unexpected good result had beaten the estimation of consensus. The supply of homes in relative to demand has dropped from 5.2 months(December) to 4.7 months(January) as the supply of new houses in the market remain unchanged, due to the lack of materials and unskilled workers. The potential hike on mortgage rate in US might dampen the housing market further as the borrowing cost increased.

sources from: ECONODAY

2)Despite the strong recovery of new home sales in January, the pending home sales in US showed only a marginal gain of 0.1%. The data on January has shown some stability on US housing market after the plunge of recent months. In US housing market, existing home sales constitute a higher proportion than new home sales. By looking at the data, it is understand that the housing market in US is still in a recovery stage which the sustainability has yet to know.

sources from: ECONODAY

3)The economy of a country is important to determine the income level of citizens, which will affect the housing market indirectly. In fourth quarter of 2013, US GDP grew in  2.4% annual rate, which is lower than estimation. Consumer spending plays an important part in US economy but the year end retails sales is not as good as assume. Bad weather in US is one of the causes.




4) In year 2013, US furniture import had increased 1,974 Million Dollars, as compare to year 2012. For your information, US is world major furniture import country, and China is his largest trading partner, follow by Vietnam and then Malaysia. Recently, the labor cost on China is going up, and hence it provides Vietnam and Malaysia's furniture manufacturer an opportunities to grow their market share. Despite that, Vietnam and Malaysia furniture industry are known as lacked of skilled workers, and the production cost of both countries are raising due to the implementation of minimum wages.



5) The competition in furniture industry is very intensive, especially from the China side. China is the largest furniture producer and largest furniture exporter in term of value in the world.

sources from http://www.slideshare.net/ClarionGermany/03-csil-alessandratracogna

sources from:http://www.slideshare.net/ClarionGermany/03-csil-alessandratracogna

As you can see from above chart, Vietnam and Malaysia are still a small market in the industry in term of production and exportation.




Conclusion

In my humble opinion, the furniture industry is showing sign of improving follow by the recovery of US housing market, albeit there are still a lot of uncertainties. I think that for those furniture companies which are able to survive throughout the 2008 crisis, they will enjoy a huge pie of cake, if let say US housing market come back strongly. Another issue to take note is, the orders for local furniture companies are increasing, which is a good leading indicator of US housing market recovery? Nevertheless, it is still early to judge.



Next, i will be touching on furniture companies listed in Bursa, and why my pick on LTHB.