Thursday, August 19, 2010

Tat Hong – FY 2010 Analysis and Review Part 3

Part 3 of this analysis delves into Tat Hong’s inventory levels for crawler cranes as well as tower cranes. It also attempts to discuss Tat Hong’s prospects for the next financial year and beyond by incorporating recent news as well as from attendance at Tat Hong’s FY 2010 AGM which was held on July 27, 2010.

Crane Inventory Levels (All Cranes)

Looking at Tat Hong’s total fleet profile, it can be seen that their inventory levels have hit a new high of 481 units even as they are trimming their inventory and boosting their fixed assets (transfer from trading stock to fixed assets for rental). The one glaring figure which explains the depressed performance is the overall utilization rate of just 56.6%, which is a far cry from their “peak” performance of 83.5% utilization as at June 30, 2007 (nearly 3 years ago). This would explain why revenues for crawler crane rental are so depressed – companies have not really kick-started their spending on buildings, oil and gas projects and infrastructure as these will lag the economic recovery; hence Tat Hong’s performance in this division will generally lag the economy by about 6 to 9 months.

The total tonnage for cranes has increased significantly though, from just 46,261 to 51,216 in one year (a 10.7% increase). Total units has also steadily increased from 438 units nearly 3 years ago to the present 481 units. Moving forward, Tat Hong should continue to focus on their transition to being a “rental” company, with more inventory moved over to fixed assets to be utilized for rental instead of for equipment sales. The effects of this may only begin to manifest over a period of 1 to 2 more years.

Crane Inventory Levels (Tower Cranes)

The tower crane fleet has grown rather significantly over the past year, with just 262 units as at March 31, 2009. This has about doubled to 551 units as at March 31, 2010 and will continue to grow as Tat Hong seeks to expand their asset base through joint ventures and acquisitions of crane companies in China. Tat Hong’s Roland Ng did stress that China was a vast market and Tat Hong still had plenty of opportunities there, but it was to be the people which mattered as the Group needed to find the right people to propel the business to the next level (note: this was mentioned during the recent AGM). He does not rule out further M&A in China to enable Tat Hong to grow its business there, but did concede that it would take about 2-3 years for the China side to bear fruit and show results. In the meantime, one can see that their inventory levels will continue to build up, as this division shows the highest potential for long-term growth.
Update: There are 614 units as at June 30, 2010.

Prospects and Plans

For Tat Hong, their strategy got growth continues to be with China and possibly India in the next 2-3 years, and of course by now I have repeated their strategy of being a “rental” company to bits, so I shall not dwell further on that in case I bore everyone to tears. I think what shareholders can reasonably expect from the company are the following:-

1) Tat Hong to ride on global economic recovery – Basically the Group’s business can be described as following the economy; though they tend to lag the real economy by about 6 to 9 months. The reason for this is because Tat Hong’s customers need to secure bank financing in order to purchase their heavy machinery and cranes; and this can only happen when there is sufficient business visibility and economic strength, otherwise companies would rather conserve and preserve their cash. Recall that Tat Hong’s results were hit by a combination of poor results from their core business of equipment trading as well as crawler crane rentals, and also lower contributions (i.e. share of profits) from associated companies (see Part 1 of this analysis). With a moderate and gradual recovery underway, share of profits of associated companies should also rise, albeit slowly, to contribute to cash and profits. Already, Yongmao Holdings Limited, an associated company of Tat Hong, has reported improved top-line growth of 61% for 1Q FY 2011, and higher net profit year-on-year of RMB 4.15 million (up 126%). In 4Q FY 2010, Tat Hong had also reported a surge in orders for equipment sales, and if the trend continues, will assist in the recovery of Tat Hong’s key revenue contributing division.

2) Tower Crane Division in China – Tower cranes will continue to be an avenue for expansion for Tat Hong in China; and they do not rule out more synergistic partnerships or accretive acquisitions which will help to boost their tower crane fleet. China’s construction landscape is somewhat different from Singapore as tower cranes are mostly used instead of crawler cranes; thus Management sees this as a viable growth strategy to become China’s dominant tower crane player. Mr. Roland Ng did caution that such growth would likely take a couple of years as relationships and networks had to be built and the “right people” needed to be found to work with Tat Hong. This is where Mr. Ng’s expertise and skills come in as he is good at bringing in such talent and expertise with knowledge of the China market.

3) India Expansion through AIF Capital – There was a brief mention of India within Tat Hong’s FY 2010 Annual Report, and I also enquired with Management on the possibility of expanding into India. Mr. Ng did mention that AIF Capital’s contacts and networks extended into India, and if Tat Hong was going to move into the country, it would be with their assistance. However, that said, there are many incumbents in India and therefore competing there was not going to be easy; plus India is “fragmented” in the sense that it has different states speaking different dialects, so communication is an issue and the way of doing business is different from both Singapore and China. I would think Management would let this simmer first and focus on building their China business before making any moves.

4) Purchase of all remaining shares of Tutt Bryant Limited – On July 15, 2010, Tat Hong announced the acquisition of all the remaining shares in Tutt Bryant that they do not already hold (as at the date of announcement, Tat Hong held 70.36% of Tutt Bryant). The offer price was A$0.92 per share and represented a premium of 46% above the last traded price of Tutt Bryant. The rationale was to cut the costs of staying listed as Tutt Bryant need not raise funds through secondary offerings; and Tat Hong could also consolidate 100% of earnings from this lucrative subsidiary in future. My feel is that Tat Hong is acquiring Tutt Bryant “on the cheap”, as Australia is just recovering from the effects of the global financial crisis and future infrastructure and oil/gas spending will boost Tutt Bryant’s profits and revenues significantly. Management’s rationale would be to be able to enjoy more of the fruits of Tutt Bryant and also assume more control over the operational aspects by holding 100%. However, as with many of their strategies, this one will probably truly “bear fruit” only in 2-3 years time, as the economic recovery at this stage is still tentative and fragile.

Quick Comments on 1Q FY 2011 Results

Since the 1Q 2011 results had been released at the time of this writing, I shall provide a quick preview. It seems the economic recovery has not flowed down through to Tat Hong yet, as the bottom line for 1Q 2011 decreased marginally by 2% year on year. However, it can be seen that revenues were up 24% even though gross margin dipped (as a result of lower margin projects in Singapore through crawler crane rental). Expenses continued to climb which was a headache, but I feel it is part of the expansion which Tat Hong is undertaking in China; and probably also for their Australian division. The Balance Sheet shows higher debts but there was also more cash to offset it, as Trade Receivables dipped due to better payment from customers.

Over at the Cash Flow Statement, there was some good news as operating cash inflows were relatively strong at S$26.6 million. Then again, there was negative free cash flow as capex for 1Q 2011 stood at S$31.1 million! Altogether, cash equivalents increased by S$10 million and the Group ended with S$87.2 million worth of Cash as at June 30, 2010.

The Group are cautiously optimistic of a better performance for FY 2011 as stated in the prospect statement, but are unwilling to commit too much to saying that things will definitely be better. I guess at this stage it’s still hard to tell, but coming off from a low base in FY 2010, it should look at least a little more positive. Also note that Tat Hong’s associates Yongmao and Kian Ho Bearings have reported better results, and this should eventually flow through to Tat Hong’s bottom-line as well through share of profits of associated companies. As long as the business continues to improve, albeit slowly, I can still look forward to a decent interim dividend come Nov 2010.


Tat Hong’s strategy for growth will need time to pan out, and it is essential and integral for them to manage their cash flows prudently and ensure that they do not “over-expand”. The financials will not look good in the short-term due to the fragile economic recovery; but longer-term wise it should start to get better. In the meantime, I can look forward to a 1c/share interim dividend and a 1.5c/share final dividend, which seems to be the “crisis-level” payout. Anything higher than this 2.5c/share yearly bonus will be indeed a bonanza!

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