Prior to the discussion on Thong Guan financial performance, please allow me to share some view on the USD/ Ringgit fluctuation and the possible effect to the earning of an export based company.
I believe market has now more or less assumed that " A STRONG RINGGIT IS NOT GOOD FOR EXPORTER".
But is this really true?
My answer is: It depends on the company you invested in and how well they managed their foreign currency risk.
There are several components involve in the forex risk/ reward::
(1) the trade receiveable (from customers), - Strong USD is good because your dollar now change for more ringgit
(2) the trade payable (to pay supplier, etc), - Strong USD is bad because you need more ringgit to pay to suppliers
(3) US dollar cash that keep inside bank- Strong dollar is good because your dollar can exchange for more ringgit/ more debt payment power
(4) and loan (+interest) denominated in USD. - Strong USD is bad because you need more ringgit to serve the loan + interest.
Based on above, WHAT IF A COMPANY HAS A BALANCE MIX OF ABOVE?
Let used Thong Guan as an example:
We all know that Thong Guan,( as well as many export based companies), are benefited from strong USD as strong USD enhanced Revenue.
However, because of THONG GUAN also had USD denominated OFCL loan (which we have discussed before), and they buy raw mat in dollar, the earning reported for the past 6 quarters does not seem benefited from WEAK / STRONG USD.
To understand more about the effect, let examine together the NET EXPOSURE of THONG GUAN to foreign currency risk.
The key here is --> Net Exposure.
Based on above, i think we can conclude that:
A STRONGER / WEAKER DOLLAR "MAY NOT" GIVE THE IMPACT TO THE EARNING AS PER THE GENERAL MARKET WILL THINK IT IS!
Let use 2014 as example:
Net exposure is "NEGATIVE", this means that Thong Guan will benefit from STRONG RINGGIT (strengthening of RM) because the USD loan + trade payable is greater than trade receiveable + USD cash. A weak dollar (or strong ringgit) mean we need lesser Ringgit to pay debt and interest, compared to previous financial period, thus give realised/ un realised gain and increase the profit by RM 3,798,000.
However, for above similar "negative", if dollar become stronger, then Thong Guan will be hit by strengthening of the USD. Because, now need more ringgit to settle the net USD exposure (primary on OFCL in USD).
2014 is a very special year due to massive expansion going on. I believe that is the reason why Thong Guan has very high "negative" exposure compared to 2011, 2012, & 2013. Under usual condition, the net exposure should be in the differential of between less than 20 million.
The rest read the same.
Below is for year 2011 & 2012.
So, What is important?
I belive is "BALANCE".
If a export based company derive it earning, purely from the business operation, and not to rely on the foreign exchange gain (achieved a very minimal net forex exposure), this company should be a promising one.
THONG GUAN, so far demonstrated such criteria under scenario of GRADUAL appreciation/ depreciation on currency exchange.
Recent Gesheng case is really a big stone smash on my toe. I think i got bitten by snake, because it cannot be so drastic in change and any change should be both way. I'm still very much in doubt.
I believe by studying based on above method, the value investors should be able to decide whether you are holding on right export based companies. Hopefully most of the doubt about currency risk can therefore be traced.
Cheers!
YiStock
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