The curious case of Kin Yat Holdings (Hkex: 638)

Kin Yat Holdings released its full year results on 26 June 18. It can be found here

Prior the results, i was pretty bullish of its ability to generate growth this full year. That is because their biggest customer iRobot Corporation(IRBT) displayed huge increase in cost of goods sold (COGS).



While the implied increase in revenue is definitely not 40% as i know that Kin Yat is not the only supplier of IRobot, i took reference of Kin Yat's FY 2016 AR to have a rough gauge.

As such i estimated that the growth rate coming from electronics would be roughly (0.4173*0.53) = 0.22 or 22%

When the results came out, i was pretty pleased on its revenue front for electronics.

36% was far beyond my expectations and probably showed that they have been used by iRobot even more.

However that was all that was 'in line'. The rest of the results were pretty bad.

As you can see colored in red, the 2nd half of both Electronics and Motors segment core margins were pretty atrocious.
In fact, the company received 69.8 million of subsidy from the local government authorities compared to 14.8 million the previous year. This resulted in better segment margins although they are still much lower than previous half and full financial years.
The fall in margins is so alarming that totally outweighed any increase in revenue.

The company attributed to this margins to moderated manufacturing margins and appreciation of Renminbi(RMB).

However what was puzzling was that the company says that motors had improved operating results. This is true if compared to FY 2016 but if 1H is to be compared to 2H, it would be totally untrue.

In terms of RMB appreciation,


Despite depreciation in 2H FY 2016, core margins failed to improve for its electronics segment
Even though there is a 6% appreciation in RMB, it seems that the fall is not proportionate considering that there is only a 1.75% fall in core margins when Yuan appreciated 3.535% in 1H FY 2017.

Its hard to tell whats the full extent of the moderation of margins. My calculations indicates that its segment margins fell by 1.926% due to this 'moderation' if currency impact is as implied above(Which i know its a rough gauge and very likely to be inaccurate)

As for motors segment which was attributed to copper price increase according to the results released,

Copper had a large price spike from 2017 May to 2018 Jan. With the largest increase being around 25%



Given that the inventory is stored for at least 3.5 months before it is sold, we can assume that they are produced a minimum of 3 months earlier. Therefore the results in this case would have reflected copper prices from 2017 June to 2018 Jan. Which resulted in really poor core margins.

However, copper prices have fell by about 7% from the peak. Whats the extent this improvements in margins will depict remains to be seen. One thing notable is that capex in motors segment has doubled to 112 million in FY 2017. Which is 1.46 times of the segment profit of motors(Roughly 76 million)

That's some hefty investments and it remains to be seen if this increase in capex will bring in an increase in profits.

*One potential inaccuracy in this result will be that the inventory is a mix of motors and electronics product so its unable to ascertain the turnover for each segment which affects the analysis.

Conclusion
-Revenue Impressed
-However margins were depressed, leading to an overall profit drop
-Company recorded gains in exchange translation reserve on the back on appreciating yuan against Hkd in the period. Resulting in a much better Total Comprehensive Income year on year.
-Company could have been much worse without government support( Something they have been frequently getting)
-New orders from another customer in VR will diversify some revenue but likely to be still reliant on IRBT
-Yuan has depreciated since the end of financial year (31 March 18), Copper price has came down since start of year as well though still at a relatively high position.
-It is likely margins will improve(at the cost of loss in exchange translation reserve) but it remains to see the amount of improvements in margin.