LCTH: Turnaround In Fortune?

LCTH is a precision plastic injection mould manufacturer like SKP Resources, VS Industry & Geshen.

It was listed in main board of KLSE on 8th Nov 2004 at IPO price of RM1.08. It is a subsidiary of Singapore-listed Fu Yu Investment which currently holds 70.64% shares as at Feb 2015.

I noticed this stock while studying Geshen earlier. What I know is that it has plenty of cash without borrowing.

However, I didn't study it further when I saw its revenue falling quite heavily in the past 2 years.

In this article, I just did a superficial research on LCTH to know more about this company.

First, lets look at LCTH past financial performance since listed in 2004.

In summary, its revenue fluctuates a lot, profit margin drops with time and it suffers loss in 2010 to 2012.

At the time of IPO, LCTH was made up of 2 wholly-owned subsidiaries Classic Advantage (Johor) & Fu Hao Manufacturing (Penang). It acquired 40% stake in Berry Plastic in 2006.

Year 2004

• Raised RM156.3mil from IPO to expand its business arm in Johor (Classic Advantage)
• Constructed a new plant with new machinery in Johor Technology Park, and will relocate old plants in Senai & Kluang to the new plant
• Net profit of 2004 (RM57.2mil) failed to meet target in IPO prospectus (RM65.3mil) due to increase oil price to USD50 and delay in completion of new factory.

Year 2005

• Relocation of Senai & Kluang plants to new plant completed in June 2005
• Revenue increased to record high due to higher capacity & orders, but net profit fell mainly due to higher oil price & price pressure from customers

Year 2006

• Joint-venture (40%) with Owens-Illinois Plastics (NYSE listed) to form O-I Plastics Malaysia (later renamed Rexam and then Berry Plastic), which will operate in a newly-constructed plant within LCTH's existing plant in Johor under lease
• OIP has contracts to manufacture inkjet cartridges
• Revenue sustained but net profit fell further due to consistently high oil price

Year 2007

• Revenue hit record high but net profit fell further, due to surging oil price
• Proposed sales of fixed assets
• Proposed bonus issue & capital reduction

Year 2008

• Revenue and operating profit hit by high oil price (>USD100) and global financial crisis
• Classic Advantage completed sales of land, factories & office block in Johor and lease back
• Completed bonus issue, capital reduction with shares consolidation

Year 2009

• Revenue and core net profit continue to drop for 5 successive years after listing as a result of global financial crisis and slow E&E sector
• Implement cost saving measures

Year 2010

• Lost a major customer who shifted to China, thus revenue took a deep fall and suffered loss for the first time since listed
• Forex loss due to strengthening of RM against USD
• Decided not to pay dividend for the first time since listed

Year 2011

• Revenue fell further and continue to suffer loss
• Faced overcapacity. Set up a new plant in central region of Peninsular Malaysia to relocate some machinery from Johor plant
• Successfully secured a new MNC customer with potential to replace the earlier loss of major customer

Year 2012

• Revenue jumped significantly by 150% after securing new customer but net loss widened, as it is yet to achieve optimal operating efficiency

Year 2013

• Revenue dropped due to change in procurement strategy of a major customer
• Achieved marginal gross profit after cost-control
• Classic Advantage sub-let out certain part of its factory and disposed certain assets to Flextronics
• Net profit in FY13 was boosted by RM18.6mil gain from disposal of assets
• Export sales increased 22% as developed countries looked to cut cost by shifting to lower cost countries like Malaysia

Year 2014

• Continuous right-sizing measures by Classic Advantage
• Revenue took another significant drop but profitability increased due to better cost control and higher margin products
• Target higher value added industries such as automotive, medical & solar power
• Expect manufacturing activities to shift out of China due to growing operating cost & strengthening of Yuan
• Expect higher demand for E&E sector

Generally, from 2004-2007, LCTH's revenue rose but net profit fell progressively due to margin pressure as crude oil price surged.

From 2008-2011 which was the aftermath of global financial crisis, it lost a major customer which resulted in substantial shrinking in revenue and inevitably, making loss.

From 2011-2014, revenue increased after securing a new big customer. Core profit improved after right-sizing moves.

Basically Hevea and LCTH suffered almost the same fate after their IPO.

Both were listed almost at the same time, in which LCTH was listed just 2 months earlier than Hevea. At that time, Hevea constructed a new particleboard plant and LCTH constructed a new one-stop plastic injection moulding plant.

Revenue of both companies rose after IPO but net profit fell until they suffered loss. Both were hit by price pressure and later poor demand during global financial crisis in 2007-08.

The main difference is, Hevea has high debts and suffered to repay its loan, but LCTH has hardly any borrowings since listed.

Hevea experience a tremendous turnaround since 2012. Though LCTH also got back from red to green since 2013, its earning "quality" is rather poor with decreasing revenue.

Though LCTH's core profit has improved impressively in 2014, its revenue is declining to the level when it lost a large customer in 2010. This is worrying indeed.

Does it lose more important customers or just temporarily lower orders?

Anyway, it hold lots of cash and is reluctant to pay it out as dividends since year 2010. Surely the management will have some serious plan in their mind.

Will it acquire a profitable peer soon just like what Geshen did?

Can it secure more new customers and more orders going into 2015 as anticipated?

Historically LCTH was a company which was very generous in dividend payout. It has a policy to payout at least 50% from net profit.

The table below shows LCTH past dividend payout ratio from 2004 to 2009. It stops to pay a single cent since 2010, though their cash pile continue to build up after assets sales and it remains debt-free.

Year	DPO
FY04	89.8%
FY05	>100%
FY06	92.5%
FY07	71.4%
FY08	78.7%
FY09	65.0%

So, dividend policy can be changed anytime.

Currently LCTH has net cash of RM76.4mil with another RM13.7mil in short term investment.

Anyway, in FY14, about half of LCTH's operating profit comes from "other operating income" such as interest & rental income.

These items should contribute year in year out to LCTH's bottom line but personally I don't like it very much if its percentage is too high.

LCTH's operating profit in FY14 is RM13.4mil, in which RM7.06mil is not from its core business.

While it has been selling assets a couple of years ago due to over-capacity in its Johor plant, LCTH has spent RM26.8mil on the purchase of PPE in FY14.

Its management even plans to spend RM65mil on capex this year. It is said to be in talk with Penang government to buy land to increase its Penang plant's capacity. 

Recently Penang has seen quite a lot of MNCs setting up their manufacturing facilities here including BOSE which is LCTH's customer.

Its other customers include Hewlett-Packard and Dyson.

LCTH is bullish on its future as it expects more MNCs to move from China to Malaysia even though it has just lost a few customers to China and other lower cost countries...

We have seen a turnaround in tech, poultry and furniture industries recently. Is this the case with plastic injection moulding industry?

From LCTH's story, low crude oil price will be good as its raw material cost will be lower while spending power in developed countries will be higher.

Almost all companies' bottom lines in this industry suffered during global financial crisis. 

Big players such as VS & SKPRes have turned around impressively with more orders from renowned major customers. Will other smaller players such as LCTH, Geshen, H&L, HIL & Luster follow?

A simple comparison of profit margin shows that LCTH is on par with others.

	Revenue	Gross Profit	Gross %	PBT	PBT %
LCTH	126.06	16.373	13.0	12.33	9.8
VS	1715.08	197.86	11.5	41.99	2.4
SKPRes	616.55	76.94	12.5	57.18	9.3
Geshen	85.00			8.42	9.9

Normally I won't invest in a company just because it has a lot of cash or assets. How the company use its cash is more important.

For LCTH, if it successfully secures more contracts like what its management anticipate, then it's good.

At current price of 48sen. it is trading at actual PE ratio of 13.4x base on FY14 EPS of 3.59sen.

There seems to be no problem in LCTH's operation, balance sheet and cash flow at the moment. It's just about the revenue.

From the big capex, it looks like the management is very confident to get more orders. Do you have the same confidence?

Geshen: Gets Double Boost

Geshen is primarily a plastic injection molding player like the famous high-flying VS Industry & SKP Resources. It was incorporated in 1995 and is based in Johor Bahru.

Base on FY14 full year net profit of RM2.56mil, it is currently traded at actual PE ratio of 18x at recent average share price of 58sen which is not attractive at all.

Its injection molding business seems to hit the bottle neck in which its annual revenue always stays at around RM80mil with little and fluctuating net profit since year 2005, except lower turnover and net loss during economy crisis in 2008/09.

Its management took some steps to grow the group by diversifying into cosmetic & skin care business in 2010, and then into manufacturing of fiber products (like Heng Huat) since 2012.

Unfortunately, these two new business ventures do not live up to expectation and incur loss without fail to the group since operation.

Here comes the first BOOST.

Geshen has disposed these 2 loss-making subsidiaries. The disposal was first announced on 19th Dec 2014 and was announced as completed on 2nd Mac 2015.

How will the disposal affect Geshen?

From Geshen's latest FY14Q4 financial report, it is mentioned that these 2 subsidiaries registered total loss of RM4.283mil in the whole FY14 (red box below).

The PBT & PAT of its continuing operation (ie. plastic injection molding) in full FY14 is RM8.733mil & RM6.825mil respectively.

However, there is a one-off pre-tax gain from disposal of subsidiaries amounting to RM1.194mil in Q4.

After deducting this special gain, its plastic segment PBT should be RM7.539mil, and PAT should be RM5.9mil base on similar 21.8% tax rate.

If its plastic business can maintain its performance and reports similar RM5.9mil net profit in FY15, then its EPS will be 7.38sen (80mil shares). 

So the projected PE ratio for FY15 will be 7.8x.

Nevertheless, there is a significant drop in revenue of FY14Q4 due to reduced order. This remains a concern.

The second BOOST is its proposed acquisition of its peer Polyplas which does exactly the same thing as it does.

Geshen will acquire 75% of Polyplas for RM33.8mil which will be paid by internal fund and issuance of 30 million Redeemable Convertible Preference Shares (RCPS) at 60sen each which are convertible into ordinary shares within 5 years.

The RCPS will raise RM18mil and its holders are entitled to 5.5% dividend per annum. 

Geshen has the option to acquire the remaining 25% of Polyplas in the future.

How good is this Polyplas?

Polyplas is incorporated in 1988 and is based in Bukit Mertajam Penang.

Though Polyplas is only half the size of Geshen in term of annual turnover, it seems to me like Polyplas is a more exciting company for reasons below:

Polyplas is growing

Compared to Geshen's stagnant revenue, Polyplas's revenue improved significantly by 39% YoY in its FY14 (ended Oct14). 

However, we don't have long enough data to ascertain that it is really a consistent growth, as revenue of contract manufacturers can fluctuate a lot. 

Anyway, recent growth is still a good sign. It is even constructing a new factory recently to increase its production and warehouse space. It is expected to be completed in Aug 2015.

Polyplas FY14 production capacity utilization rate is at approximately 52% based on operating hours.

The utilization rates based on various machine tonnage are as follows:

There are different machine tonnage which caters for different customers' products so it is almost impossible to utilize all the machines at one time.

Anyway, it is reported by analyst that SKPRes has current utilization rate of 75-85%, from 60% during its disappointing time in calendar year 2013. It has constructed new factory that will increase its capacity by another 75%!

       Polyplas @ Bukit Minyak

Polyplas has much better profit & margin

Despite lower revenue by half in FY14, Polyplas manage to produce better net profit than Geshen. 

This is because of its unbelievably high net profit margin of 18% in FY14 despite an effective tax rate of 22.6%.

Report says that this is achieved through better sales and production efficiency, without any one-off special gain.

Polyplas has more diversified business & customers

Geshen mainly involved in plastic injection molding for Electrical & Electronics sector, primarily in audio-visual segment.

Apart from E&E sector, Polyplas has capability and business in manufacturing products for medical sector which might be the next investment theme.

       Medical products by Polyplas

Polyplas derives 55% of its revenue from export sales to Asia, Europe and US, while 85% of its raw materials/components are sourced locally in FY14.

       Marked sales improvement across the board


There should be a mistake in the table above in FY14 which I think sales to Hungary should be close to zero. However, overall sales to Europe still increases by a good 33% YoY.

Geshen's has largely Japanese customers but Polyplas has wider geographical presence and strangely, there is no Japan in the list.

Polyplas's main export country in FY14 is US, which makes up about 37% of its export followed by Europe (32%) and Asia (31%). So, acquisition of Polyplas will give Geshen a good global exposure straight away.

US economy is recovering while Europe and Japan are busy printing money now. Will this give Geshen another boost?

Polyplas has much better official website

Though this is half joke but I have a tendency to judge a company by looking at its website, though I know that it's wrong.

Both VS and SKPRes also have lousy website design but they are good companies.

You can go to Geshen and Polyplas official website and see for yourself.

Geshen will acquire 75% of Polyplas. If Polyplas can achieve similar net profit of RM7.9mil in FY15, then Geshen will get RM5.9mil.

If we add together projected net profit of Geshen (RM5.9mil) and 75% profit of Polyplas (RM5.9mil), it will be RM11.8mil.

After the corporate exercise, Geshen's outstanding shares will remain at 80 million as long as no RCPS are converted into ordinary shares. So, guesstimated FY15 EPS for Geshen will be 14.8sen.

After all the RCPS are converted, Geshen's shares base will increase to 110 million. So, diluted guesstimated EPS will be 10.7sen.

Please bear in mind that even though Polyplas produces a great profit margin and financial result for FY14, it does not mean that FY15 cannot be poorer.

Anyway, sooner or later Geshen will acquire the remaining 25% shares of Polyplas. If Polyplas remains profitable, then it will add a significant amount of profit to Geshen in the future.

Geshen does not acquire 100% Polyplas's shares at one go as it wants Polyplas's director and founder Narinder Singh to stay committed to lead the company.

Mr Narinder is a real entrepreneur and almost single-handedly leads Polyplas. His leadership was just recognized last year and it remains a mystery why he decided to sell his company.

Overall, at below 60sen per share, Geshen looks undervalued after all those corporate exercises which is expected to be completed in the 2nd quarter of 2015.

Its RCPS is set at 60sen per share which is higher than current share price of below 60sen!

Balance sheet and cash flow of Geshen is good and it currently has net cash of RM10.8mil. It needs RM15.8mil cash to acquire 75% of Polyplas so apparently no more net cash after this.

Geshen shares liquidity is very low, with merely 80 million paid-up shares in which only 25.96% are in public's hands and the top 30 shareholders have already taken up 91.6% of the company.

Earlier this year, its public shareholding spread of 22.83% was not compliant with listing rule so its major shareholders have to dispose 2.5mil shares in Feb15 to lift the figure to 25.96%.

When I first notice Geshen through an article by Icon8888 in i3investor, I actually have the same excitement as when I first discovered Latitude Tree. 

Both have operation in Vietnam and both are going to acquire something that will boost their earnings significantly.

Latitude produced superb organic growth with magnificent quarterly results while Geshen is going to get rid of its loss-making subsidiaries.

However, Latitude is one of the market leader in its industry but Geshen is not. Latitude's revenue is growing all these years but it is not the case with Geshen.

Plastic injection molding is a highly competitive industry with over 1,500 manufacturers in the country.

VS Industry and SKP Resources/Tecnic are clear market leaders. Other listed players include LCTH, HIL Industries, Kumpulan H&L, Luster etc.

Once these contract manufacturers get a fat contract to manufacture and assemble something new, their revenue and profit will surge. This is shown in VS (Keurig coffee machines) & SKPRes (Dyson vacuum cleaner). 

Geshen is clearly still not in that league but it has been trying to grow the company through diversification twice since 5 years ago. Hopefully it's third time lucky for Geshen.

SKPRes is trading at high PE of over 15x now but it seems to have strong growth and capacity expansion ahead. Otherwise I think fair PE for this industry should be 10x.

For Geshen, it might only command a PE of 8x the most. I'll use my FY15 forecast diluted EPS of 10.7sen to set my target price. Thus my target price for Geshen will be 86sen.

It's better to be more conservative as Geshen's FY14Q4 revenue drops 35% QoQ, and Polyplas might not sustain its good performance in FY14.

Though disposal gain of its subsidiaries are consolidated into its FY14Q4 report which ended in Dec14, but the completion of disposal was only announced on 2nd Mac 2015. So I'm not sure whether the loss-making subsidiaries results in Jan-Feb15 will still be included in its FY15Q1 or not.

With wider customer base, inclusion of Polyplas management team and diversification into medical products, hopefully Geshen can achieve significant organic growth which it fails to achieve in the past 10 years.

SKPRes: A Star Losing Its Shine

When I bumped into SKP Resources in early 2013, I thought I have found a jewel.

Its revenue and net profit increased tremendously in year 2012. It is extremely cash rich with zero debt, and gave very good dividends too.

Its biggest customer Dyson appoints it to manufacture and assemble its uprights vacuum cleaner. If I'm not mistaken, SKP even builds new factory just to cater for Dyson's order. 

At the same time, Dyson, who has the world's largest vacuum cleaner market share, is entering China market.

       SKPRes recent quarterly results

I bought SKP's shares in early May 2013, but sold all with minimal gain after it announced its poor FY13Q4 financial result about one month later.

SKP is over-dependent on one customer which is Dyson. The significant drop in revenue and profit in FY13Q3 was actually a warning sign. I made a mistake as I still bought its shares afterwards. I've learned now that I should be extra careful with any unexpected drop in financial results without a good reason. It's either a NO BUY or SELL.

At that time, I remember that TA is still very bullish on SKP, giving reasons such as less working days during festive period & stocking for China market opening. I'm actually thinking, are these good reasons or just excuses? TA even gave SKP higher target price at that time!

I sold SKP because first, its FY13Q4 result was worse. Secondly, while investors are hoping the new China market can increase SKP's order from Dyson, China market actually doesn't sell the Uprights vacuum cleaner which is manufactured by SKP!

       
       Dyson China website: Uprights is missing

Now, after almost one year, SKP's performance is still not up to mark, struggling with less orders from major customers and increasing wages and later electricity tariff.

In its latest FY14Q3 result released this week, both revenue and net profit crashed to a new low since calendar year 2011.

Nevertheless, its cash continues to pile up with RM98.5mil cash and no debt. It gives 2.2sen dividend for FY2013 ended Mac13. At 0.31sen per share, it's a good 7.1% yield. Its ROE for FY14 should be around 13% though.

From previous year's trend, SKP should declare its interim dividend in early March. Will it still pay good dividend as its business is declining?

Just look at the most recent target price given by TA and RHB. TA gives a buy call with 55% potential upside, while RHB says sell with 43% potential downside. 

Which one will you follow?