Tat Hong – 1H FY 2010 Analysis and Review Part 2

In Part 2, I will be examining the Business Unit performance for Tat Hong’s various divisions (they have 5 in total) and commenting on the margins for each division. Please note that the financial crisis may skew the numbers during this period, thus it may not be representative of the actual gross margins in terms of the average performance for each division over the long-term. I will need more time and data to compile in order to see the trend of gross margins and also the core performance of each division as a comparison against Management’s stated growth plans.

Business Unit Revenue Analysis


Looking at 1H FY 2010 (“this year”) versus 1H FY 2009 (“last year”), one can clearly see a trend of revenues shifting from equipment sales to crawler crane rental. For this year, crawler crane rental took up 34.5% of revenues, up from 24.6% last year. By contrast, equipment sales % fell from 46.9% to just 32.2%. If we add up Tower Cranes’ share of revenues, then for crane rental for this year, the proportion of contribution to revenue jumps to 41.4%, versus just 27.7% last year. That is a significant jump of 13.7 percentage points and does demonstrate Management’s commitment to transforming Tat Hong into a “rental” company. Of course, if we are comparing revenues on a year on year basis, the drops have been pretty steep due to the severity of the global downturn; and Tat Hong is after all in a cyclical industry where the demand for their cranes and heavy machinery stems from economic growth and policies which affect construction and oil and gas industries.

Looking at 2Q 2010 versus 2Q 2009, there were steep drops in crawler crane and general equipment rentals, with decreases of 16.9% and 43.6% respectively. The Company should focus more on cost control during such periods and I was disappointed that they could not reduce their cost base, thus eroding profits by a significant amount as compared to the drop in total revenues. Tower Crane division was the only bright spark amongst a dismal quarter, as revenues there climbed 45.5% from S$6.1 million to S$8.9 million. Equipment sales dropped a very steep 50.8% as customers withheld investments in capital equipment due to higher financing costs by banks amid tightened regulations in the wake of the financial crisis. A recent announcement by Tutt Bryant also seems to imply the worst is yet to be over, and demand for the Group’s services may remain subdued for quite a while. It will take a least a few more quarters (I believe) for business activity to get back to pre-crisis levels. In the meantime, the Company is channelling more funds into growing their China Tower Crane operations, while slowly converting more of their inventory to fixed assets (from sales to rental).

Business Unit Gross Margin Analysis


2Q 2010 versus 2Q 2009

It is readily apparent that gross margins for 4 out of 5 business divisions declined, with only General Equipment Rental showing an improvement in gross margins of 6.2 percentage points to 44.2% for 2Q 2010. Note too that crawler crane rental gross margin remained very high at 60.5%, despite dipping about 2 percentage points from the same period last year. For Tower crane rental, gross margins were 32.6% and 36.1% for 2Q 2010 and 2Q 2009 respectively. Though this is significantly lower than crawler crane margins, it is still much higher than the gross margins achieved through equipment sales, which on average only registers gross margins of less than 20%.

The good news is that the revenue mix has shifted significantly, away from equipment sales and towards more of crane rental, as can be seen in the previous table. For 2Q 2010, Equipment sales made up just 33.6% of revenues, down from 45.2% a year ago. Crane rental, on the other hand, made up a total of 40.6% of revenues for 2Q 2010, up from just 29.8% a year ago. This has resulted in overall blended gross margins increasing from 36.8% to 39.7%, as more revenue has been accrued through higher margin activities. Since the trend for the Group is to move towards being a “rental” company, and Tat Hong is also building up its Tower Crane division in China, there is a high chance of increasing gross margins in the years to come.

1H 2010 versus 1H 2009

For 1H 2010, gross margins for crawler crane remained quite stable, at 61.1%, just a slight dip of 2.2 percentage points from the same period last year. This was probably due to customers asking the company for lower rates as the economic crisis has hit everyone hard. Tower crane margins also dipped to 33.9% from 36.8%, and the most severe dip came from Parts and Services which saw gross margins fall 8.8 percentage points from 61.3% to 52.5%. General Equipment Rental saw a huge boost in gross margins, surging 17.8 percentage points from 24.3% to 42.1%. Though it is unclear what caused the big boost to gross margins for this division, it is most likely pricing power and possibly a shortage of supply, but this is just postulation. More quarters will have to pass to determine if this was a one-off occurrence, or whether there is persistence in maintaining these higher gross margin levels.

Overall, for 1H 2010, gross margins improved to 39.6%, up 5.3 percentage points from 34.3%. Note that there is a trend of increased gross margin as Tat Hong shifts away from its heavy reliance on equipment sales and moves towards crane rentals. It is beefing up its rental fleet (classified as PPE), while reducing its inventory of cranes and heavy equipment. However, the revenues will certainly dip as crane rentals typically have lower volume compared to equipment sales, especially during bullish periods. With the news from Tutt Bryant that conditions have yet to significantly improve, and that the economy may remain sluggish for an extended period of time, Tat Hong’s earnings are also expected to stay flattish, though Tower Crane segment shows good signs of potential growth.

Part 3 of the analysis will focus on Tat Hong’s Inventory levels, as well as plans and prospects, incorporating all the news which has flowed in since Nov 2009 when the results were released.