A brief look at 0868.HK Xinyi Glass

4 weeks ago JCprojectfreedom 0

Xinyi Glass Holdings is a specialist which produce float glass, automobile glass and construction class. Its customers includes large international automobile corporations such as Ford, General Motors and Volkswagen.

The short selling report has argued Xinyi Glass has not remitted cash from China to Hong Kong for payment of dividends and financed by Hong Kong debt, abnormal profitability compared to its peers, continuous losses from disposal of plant and machinery has suggested depreciation are not conservative in accounting approach. Let’s take a quick look at 2019 Interim Report to study this company whether it is worth investing.

In the interim report, it stated that performance was satisfactory due to stringent control over production costs, depreciation of Renminbi, upgraded product structure, a better product mix of float glass with more overseas contributions from operation in Malaysia and better marketing strategy. Xinyi Glass has new products for applications in advanced driver assistance systems, head up display, sound proofing and sun roofs for new car models.

PRC government has continued to tighten the policy on constructing new float glass production lines and phasing out obsolete and non-compliant float glass production lines due to higher environmental standards on emissions. PRC government will take on more monetary policy to spur construction activities which will increase the demand for construction and float glass. Xinyi Glass deems itself ready for overseas expansion.

Revenue

Decrease in revenue was attributed to drop of the float glass business. The lower selling price and depreciation in RMB leads to 14.7% drop as compared to same period in 2018. Increase of automobile glass was due to volume growth in overseas sale of automobile glass. Xinyi Glass feels that low emission glass will increase in sales due to stronger demand because of environmental protection requirement by Government.

Gross Profit

Gross profit decreased by 7.8% in 30 June 2019 to HK$2,688.9 million as compared to HK$2,917.9 million for same period in previous year. The drop in float glass gross margin was a result of the lower selling price in competitive market environment and higher production costs due to stricter environment concern. The slight increase of gross profit margins of automobile glass was due to depreciation of RMB as 78% of automobile glass was contributed by overseas sales.

Net Current Assets

As at 30 June 2019, the Group had net current assets of HK$1,228.9 million with current ratio of 1.12 (2018: 1.39). The drop of net current asset ratio represented more capital expenditures and investments made in current period.

Interim Financial Report – Balance Sheet

There is an increase to 389,910 for Prepayments for Property, Plant and Equipment and Land Use Rights on 30 June 2019 compared to 31 December 2018 which is 191,677. The numbers are in HKD thousands. This is close to 100% increase.

Investment in associates increases from 4,679,890 in 31 Dec 2018 to 5,103,966 in 30 June 2019.

I am interested in looking at the cash and bank balances, fixed deposits and pledged bank deposits. They are higher in 30 June 2019 compared to 31 Dec 2018.

Retained earnings has increased from 17,037,302 in 31 December 2018 to 18,072,779 in 30 June 2019. The Non-current liabilities has decreased from 7,374,221 in 31 December 2018 to 5,919,783 in 30 June 2019. Current liabilities increased from 6,602,785 in December 2018 to 10,073,321 in June 2019.

Consolidated Income Statement

It is observed that administrative expenses and selling and marketing costs increased whereas revenue dropped comparing 30 June 2019 to June 2018. Looking at Finance Cost (under note 18 in the report), the cost increased from 95,046 to 140,751 in June 2019 which is close to 50% increment.

Cashflow Statement

Cash Flows from Operating Activities decreases from 2,188,955 in 2018 to 1,513,248 in June 2019. Free Cash Flow decreases from 1,123,796 in 2018 to 336,405 in June 2019. I did not see details on Purchase of financial assets at fair value through profit or loss which is 332,795 and addition to investment in associate which is 770,263. Cash flows from financing activities has an increase in bank borrowings from 1,891,037 in 2018 to 2,632,000 in 2019.

Management Shares

Realbest owns 18.09%, High Park owns 6.65%, Copark owns 6.16% and Telerich Investment owns 6.28%. Realbest is wholly-owned by Dr Lee. High Park is owned by Mr Tung Ching Bor. Copark is wholly-owned by Tan Sri Datuk Tung Ching Sai. Telerich Investment is owned by Mr Lee Sing Din, brother in law of Dr Lee.

Operating Performance

From Morningstar: Xinyi Glass Operating Performance

Return on Asset at 12.83% passed our criteria. Return on Equity of 22.79% passed our criteria. ROIC of 13.83% is slightly lower than my requirement. Its Debt/Equity ratio is at 0.53, Price/Cash Flow is 9.11, Price/Book ratio is 1.83.

Conclusion

I believe this is an interesting company to look into. I was looking at this company when price was about HKD 7.5 with a target price of HKD 10 in mind. When I look again, it is now HKD 9. I have added this company to my watch list.