While all seem in favourable conditions to Thong Guang, there are risk too when investing into it. But i believe such risk can be mitigated by Thong Guan's management.
And if you continue to practice value investing and monitor the company performance from time to time, you should be doing just fine.
Risk, If i would to pick one area of the "risk" within thong guan itself, i must say is "bad debt" item.
This is a key area in any business, not only Thong Guan.
When you able to sell your product well, you must make sure you can collect back the money.
I believe all listed companies will have similar challenge, all have "Trade and Other Receiveable" in their balance sheet.
MOST companies will forever hide the "bad debt" in their "trade & other receiveable". Very little, Thong Guan is one of them, will actually recognised it as " IMPAIRMENT ON RECEIVEABLE".
See below:
If you notice in Q3 of 2015, there is this amount call impairment loss on receivables - RM 2.077 mil. Is about 17.7% of the net profit. To me, 17.7% is something should not be ignored compeletely, eventhough this is something you can only minimize, but impossible to eliminate.
I tried to tabulate some history, it seem like such item only start appread in 2014 report. See below:
| Year | 2011 | 2012 | 2013 | 2014 |
| Total Trade Receiveable & Other Receiveable '000 (carrying amount) (a) | 77,523 | 80,899 | 108,260 | 114,936 |
| Trade '000 (carrying amount) (b) | 73,963 | 74,081 | 100,178 | 99,219 |
| Non-Trade'000 (carrying amount) (c) | 3,560 | 6,818 | 8,082 | 15,717 |
| Amount Impaired '000 (d) | 1 | 189 | 26 | 5,446 |
| Trade Payable'000 (e) | 78,867 | 79,869 | 97,873 | 98,171 |
| Cash '000 (f) | 38,570 | 79,009 | 70,250 | 91,560 |
| Revenue '000 (g) | 540,013 | 631,193 | 720,276 | 732,590 |
| (b) / (g) | 13.7% | 11.7% | 13.9% | 13.5% |
Based on above table, i try to conclude that:
1) The "Trade" receiveable (b) carrying amount is moving up concurrently with the carrying amount of "Trade Payable (e) and "Revenue (g)" -> more sales lead to more trade receiveable and more trade payable
2) (b)/ (g) is rather constant which is good.
3) "Amount Impaired (d)" is too much a surprise for year 2014, the amount was RM 5.446 million.
4) And in single quarter of Q3, 2015, the amount was RM 2.077 million. Almost 40% of the whole of 2014. Will there be more impairment in coming quarters? This is a big question mark.
5) Why 2014 got huge impairement? Not 2011, 2012, 2013? Is there a policy change in accounting on the receiveable item? or due to customer "chaw ka" or bankrupt? This is also another question mark.
More detail below:
Based on below 2011 & 2012 info on the "Trade" Receiveable details, most credit risk exposure is on domestic market. Could this be the reason of no bad debt? I dont know.
Based on below segment report, Japan is the biggest market, followed by domestic, then China.
Come to year 2014, as per below, we start to see the huge impairment amount of RM 5.446 million in 2014, Is there a accounting policy change? or really there are customers go bankrupt and resulted in bad debt?
And based on the 2014 credit risk report below, exposure has seem turned to oversea
See below geographical segment for 2014,
The best "guess" i can do is:
1) Japan has dropped into short recession in mid-2014 when the Abe's goverment increase the comsumption tax to 8%. They have planned another comsumption tax up to 10% in April 2017.http://www.japantimes.co.jp/news/2015/10/14/business/economy-business/abe-orders-work-on-a-concessionary-tax-rate-to-cushion-blow-from-consumption-tax-hike/#.Vr62urR94_4
Could it be the Japan technical recession in mid 2014 causing the 2014 huge impairment ?
Noted below a surged in total company bankrupted in mid - 2014 and mid-2015.
Positive Thinking:
(1) Japan overall company bankruptcy numbers is going down.
(2) Q3 & Q4 2015 are 2 GOOD quarters for JAPAN.
(3) Japan QE is on going to push the economy ALL THE WAY TO 2020 Olympic.
(4) The continue of weak oil price causing low raw mat cost + continue of weak ringgit to push export + massive expansion in plastic manufacturing capacity and noodle manufacturing capacity = bring in more profit to cushion this impairment item and propel the profit.
(5) Latest news: if you read carefully within the lines, Acquisition Talk of another plastic company is on going. And recently only one plastic company share price went up CRAZILY! Maybe this is the clue.
(6) Japan Yen is superbull, which should be good for import and debt payment ability.
(7) If Q3 2015 "impairment on receiveable" is NON-recurring, what will going to happen to the profit?
Negative Thinking:
(1) all above good news turn negative?
(2) china, the 3rd bigget market "gao wun tim"?
(3) more thong guan's customer "chao ka" or bankrupt?
NOW,
YOU WANT TO THINK POSITIVE OR YOU WANT TO THINK NEGATIVE?
Cheers,
YiStock
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