Highlights

Thong Guan Industries Berhad

Author: YiStock   |   Latest post: Thu, 27 Sep 2018, 2:51 PM

 

THONG GUAN - Is the USD LOAN a Concern? (5) - YiStock

Author:   |    Publish date:


 

Hi All,

I wish everyone HAPPY CHINESE LUNAR NEW YEAR. 

Yesterday morning, i have read about an investment bank report mentioning about downgrading Thong Guan. Once again, i witness the uniqueness of investment bank when they write the report. I will raise my doubt about the report at the last part of this article. But before this, let me touch a bit about Thong Guan's "DEBT"

 

Above table i extracted out from latest Q3, 2015 quarter report. We noticed a big sum of "Loss on foreign exchange". REALISED = RM 5,733,000 and UNREALISED = 0.

 

The loss has been largely associated with TGUAN's US Dollar denominated loan. When Ringgit is Weakening, the forex loss will be greater. This is how the vast of us interprete. BUT, IS THIS REALLY THE CASE?

Let dig further into the detail, we noticed this special item " Onshore foreign currency loans", which stood at a very large portion of the total liability (about 74% of total current liability). Other loan in oversea currency are in small amount, therefore, i will use the onshore foreign currency loans (OFCL) as discussion subject.

 

What is this Onshore Foreign Currency Loan? (See below the great package from Maybank), I have check Hong Leong as well, they all about the same criteria.

 

As shown above, OFCL is a short term facility, with maximum loan period of only 180 days or LESS. What does this means?

1) this is short term loan designed for importer/ exporter like Tguan to minimize the forex risk. 

2) every time when a "CYCLE" of OFCL is taking up,  the forex rate will change accordingly.

3) THE EXPOSURE TO FOREX GAIN/LOSS is SHORT TERM, 6 month or shorter.

4) THE FOREX RISK depends on the rate of change WITHIN THE LOAN PERIOD.

 

Now, Let get back to the book. 

Tguan used to benefit from such OFCL. Over the years, the management has been taking such short term loan.

Below i extracted out the latest 8 quarters data from the financial reports as per show below. It is a little bit messy when looking at it. I suggest reader to take some time to understand the flow:

How i read:

1) everytime when reading a financial report, the amount of "onshore foreign currency loan" shown is actually an amount that "STILL OUTSTANDING" which will be carried forward and "to be paid"  in  the next quarter. Example for report ended 30 jun 2015, the amount of 33,408,000 is the outstanding liabitlity "as of" 30 Jun 2015. This amount need to be paid from 1 July 2015 till 30 sept 2015 (3 monhts) or till 30 Dec 2015 (6 months MAX)

2) using the same 30 jun 2015 report, the amount of "total forex loss" reported is actually derived from the OFCL carry down from previous quarter ended 31 March 2015.

So, for report ended 30 Jun 2015, the total forex loss reported of - 2,098,000 is actually due to loan of 64,797,000 inherited from 31 March 2015. The other read the same.

3) There is a column indicating the USD/RM at beginning and ending  3 month period in above table. I try to use the data for every 1st day of beginning quarter and last day for the end of the same quarters. And i tabulated out the % RM weakening during the same quarter. I somehow able to see a trend of the total forex loss. I hope you get what i mean.

4) Now, in the last 2 column, i noticed REALISED and UNREALISED forex loss. My understanding is that everytime when a NEW CYCLE of loan is taking up, and if it is not fully repaid (not complete cycle), the "UNREALISED loss" for the balance outstanding need to be recorded. From last 2 column, those that has ZERO unrealised forex loss, i believe is indicating the "LOAN OF PARTICULAR CYCLE"  has been FULLY REPAID. 

5) Noticed also for Q4 2014, the management has taken huge OFCL amounted to 59,597,000. Such amount has been carried forward to subsequent 2 quarters (can see unrealised forex loss). Most of the Reaslised loss is recorded in 1st Q and 2nd Q of 2015. Thankfully to the lower % change of RINGGIT VS USD. But again, the management has issued the ICULS and raised the fund of RM 52.6 million. Plus the positive free cash flow, they managed to settle the total loan.

6) Ringgit has depreciated the most in 1 july 2015 to 30 Sept 2015, a total of - 16.42%. This lead to 5.7 million forex loss eventhough the carrying amount is only at 33.4 million.

 

NOW, 

7) The good news is, from 1 oct 2015 to 31 dec 2015, the ringgit has "strengthenen". +2.31%

 

IF, My interpretation of above is correct, which mean the FOREX LOSS of 5.7 million reported in the 3rd Quarter should not be seen in the UPCOMING 4th Quarter report. If TGUAN managed to remain bullish on their production, the RM 5.7 million should be their profit instead. That push their total earning to nearly RM 17 million per quarter or EPS of 16.1 sen per quarter (instead of 10.7 sen reported). 

How about the foreign exchange "GAIN" that currently appreared in the latest Q report? 

I noticed that such "gain" is very "irrelevant" because they are either zero, or they are in "unrealised" form. It is just like when you keep the cash in "DOLLAR", the up and down of the exchange rate will continue to generate "unrealised" gain or loss. The "net exposure" is still very much depends on the USD denominated loan. So, i'm not too worry about this item.  

 

With the massive expansion going on, plus QE in japan, are we anticipating a whooping of total 64.4 sen EPS for the rolling 12 months. 

Let wait and see. 

 

Cheers, YiStock

 

Now, let get back to the investment bank report. Personally i disagreed with several points.

See below:

I personally have several doubt on above:

1) Tguan has limited upside potential? 30 % discount? 

2) The report date (7 Jan 2016), but use FY 2014 financial figure of "high proportion of USD loan" to judge? 

3) Scientex and SLP got expansion plan, Tguan has it too.

 

 

HAPPY NEW YEAR :-) Cheers!

 

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Labels: TGUAN

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Chart Stock Name Last Change Volume 
TGUAN 2.54 +0.02 (0.79%) 127,500 

  3 people like this.
 
Jeffbkt Thanks YiStock for such a very detail analysis. From the color of the report, I know which IB you are referring to who always give over optimistic TP for stock that they want to promote and sometimes (not all the time) provide unfair/unprofessional analysis for stocks when they want to downgrade. It happens to tomypak as well where I laughed when the report said that the reason of downgrade because they doubt the sudden surge of the profit margin. In fact nowadays, I am really in doubt the accuracy of the IB report as they are just too many misleading reports cases.
06/02/2016 1:02 PM
rikki Onshore Foreign Currency Loan (OFCL) is a short term foreign currency loan available for exporters and importers. The unique features of OFCL is that companies need to repay the loan in foreign currency upon maturity. Companies preferred OFCL due to the cheap financing cost.

For exporters in foreign currencies, this is not an issue due to natural hedging bcoz their export proceeds will be in foreign currencies and thus will be able to repay the foreign currency loan upon maturity.

For importers, the risk is higher if they do not have foreign currency proceeds to repay the loan and they will incurred foreign exchanged losses if the foreign currency appreciated. This risk can however be mitigated by entering into a foreign exchange contract.

As for Tguan, they are exporting in USD, thus there is no added risk as they are able to naturally hedge their position. The risk will only come in if they finance more than their foreign currency export proceeds. Even that, Tguan can always hedged their position under foreign exchange contract.

OFCL financing in USD is presently very cheap at a cost of less than 2 % per annum.
06/02/2016 2:12 PM
zefftan I remembered half year ago the red color report they also gave Scientex a target price of RM5.xx when it was trading at RM6.5

But now ...

Haha time will prove the answer
06/02/2016 4:10 PM
Icon8888 The worst cimb

They stick to 2.50 TP even after super good result
06/02/2016 5:22 PM
Sulcata Thanks for details sharing
06/02/2016 5:33 PM
soojinhou Thank you for the great research! Have certainly learned a thing or two. I have read through the downgrade report, the analyst is comparing Tguan to low margin film manufacturers. But last 2 quarters showed increasing gross profit margin for its plastic products. The donkey analyst doesn't appear to appreciate that Tguan expansion is not only generating higher revenue, but higher margin as well.
06/02/2016 5:35 PM
Koon Bee Yak Yew Chee from Singapore work in the bank earned sgd27 million in 4 years but paperplane earn rm700...LOL
06/02/2016 5:35 PM
Icon8888 Wahaha donkey analyst

That is what we should call them in the future if they make nonsense calls
06/02/2016 6:48 PM
tkp2 Hi Icon and KB, still so busy teasing paperplane ah, wakakakaka

Wish both of you gong xi fa cai, huat dua cai this year !!!!!!!
06/02/2016 6:56 PM
hissyu2 haha~~ those reports are jokes... all based on assumption, forecast and so on... better jadi fortuna teller la~~
07/02/2016 12:03 AM
paperplane Just becauss they tell truth u all attack? What a low life.
07/02/2016 2:24 AM
paperplane After read this me feel more 8nsecurued
07/02/2016 2:27 AM
wonderboy YiStock you are highly qualified as an analyst than that "suka-suka put any figure" analyst, keep it up with your good job
07/02/2016 6:50 PM
wonderboy My suggestion to "suka-suka put any figure" analyst: please withdraw the research report, apologize, and replace with the correct one immediately
07/02/2016 7:03 PM
chankp7010 An excellent insightful report. Thank you very much Yistock. You are indeed very good comparable to icon8888. Please write more of such reports to educate us and we really appreaciate your fine works.
08/02/2016 10:36 AM
ckkhen Excellent rebuttal with facts and figures. Keep it up, Yistock.
09/02/2016 12:41 PM
chankp7010 For Yistock, Your report is excellent; not only you provided details analysis on onshore foreign currency Loan but also helps us to see how investment bank reporting may not be correct in the true sense. I eally enjoy reading your article. Please write more to enight us. Thank you.
24/02/2016 9:12 PM
bracoli Yistock keep up the good work.
24/02/2016 9:16 PM


 

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