Monday 22 October 2018

A simple fundamental view on Design Studios. Is it losing its competitive edge?

Design Studios released its profit guidance on Friday night.
This is its 2nd profit guidance in 2 years, having released one for Q4 of FY 2017 citing the 3 reasons as follows for it.

-Deterioration from forecast due to commercial judgements on revenue and cost for residential projects (Related to project cost overruns, prolongation on project construction durations)
-Write-downs made on inventories
-Impairment of doubtful receivables

The profit guidance for 3Q FY 2018 are for the following reasons
-Cost-overruns from delays and a provision made on a project in United Arab Emirates
-Provision made for restructuring costs associated with the manufacturing facilities in the Group

Having said that, it seems like project overruns are looking at a norm, which is definitely not a good thing for any order book company.

 Having changed their way of reporting in financial statements, the 2018 quarter results reveal much more details. A snippet of the 2Q 2018 results is seen below. Full file can be found here.

On first glance, the key takeaway would be subcontractor cost has increased tremendously when compared to revenue.

From 33.34% in 2Q 17 to 52.89% in 2Q 18, it seems like more of the work is being done externally, if more work are being done by others, profits can only increase IF their own staff are doing lesser.
Which is not the case as staff cost has increased 10% year on year.

Although it would be quick to jump to conclusions, I would say there could be a few reasons such things happened.

Do note that these are just pluck from the clouds idea and are from my own imaginations only. :)

1) Someone key left the company and the work needs to be outsourced as they can't do it internally. This could explain how revenue increased 30.1% but staff cost went up only 10.4%.

2) They have always been outsourcing but now face price pressure as the companies they outsource to demand for higher prices.

3) Outsourced companies did not do the job well, forced to employ more companies to do the job, leading to higher cost.

Either way, this outsourcing has seems to erode value of the company such that higher revenue resulted in much higher outsourcing cost.

Moving towards its 3Q 2018 results, i would want to take a closer look at its quarter on quarter outsourcing cost/ revenue which has been increasing year on year.

Tuesday 16 October 2018

东岳集团 Dongyue Group (HKEX: 189) Spin off of Organic Silicone Segment

Dongyue Group announced spin off details of its Organic Silicone Segment(Dongyue Organosilicone) on 12 October 2018.

While there has been more specific details this time round, the announcement should not come as a surprise as there has been announcement with regards to a possible spin off since 29 March 2018.

Pre-Spin Off Details(Can be found in Link above)

Current Net Asset Value of Dongyue Organosilicone (As of 31/8/18): 1.98 Rmb per share
Shares Outstanding: 900 000 000
Dongyue Group Share of Dongyue Organosilicone = 77%

Number of maximum new shares to be issured on A-share market: 300 000 000
Maximum issue price per share = 4.5 billion Rmb or 15 Rmb per share
Minimum issue price per share = Nav Price (1.98 Rmb per share)

Dongyue Group estimated share of Dongyue Organosilicone if maximum issue occurs = 57.75%

Implied market capitalization of Dongyue Organosilicone at maximum issue = 18 billion Rmb
Dongyue Group's share = 0.5775*18 = 10.395 billion Rmb = Roughly 11.79 billion Hkd

Dongyue Group's current market capitalization(As of 16/10/18) =2.1 billion shares * 4.80(share price as of 16/10/18) = 10.08 billion Hkd
Dongyue Group current Net Asset Value (As of 31/6/18) = 4.02 Rmb
Implied Fair Value of Dongyue Group post spin off = 4.02-1.98+(10.395/2.1)
                                                                                   = 6.99 Rmb or 7.92 Hkd

Dongyue Organosilicone Profit

2017 Full Year: 285,348,000
2018 1H: 449,002,000

For the 1st 2 months of  2H 2018, the profit can be estimated as Net asset value is provided for as of 31 August 2018 and 31 June 2018

Net Asset value at 31 August 18 = 1.98 Rmb per share = 1,782,000,000
Net Asset value at 31 June 18 = 1,607,322,000
Estimated Profit = 174 678 000

The profit in the first 2 months is roughly 38.9% of 2018 1H, representing a decent mathematical chance that the profit will be stable in both halves of the year.
It also means that the profit will likely be higher than 2017 Full Year Profit

However, 107 胶  which accounted for 38.2% of Dongyue Organosilicone's revenue and 9.15% of Dongyue's revenue might be faced with price pressures having seen its price in October fall lower than its price last year. On the bright side, the first 9 months have had a higher price than it was in 2017 and it was around the same period last year that prices started a crazy rally.


The exact amount raised in the spin offs will likely determine the value of Dongyue Group as a whole. While the ideal scenario would result in a higher fair value, spin offs listings are still subjected to demands for IPO as a whole and in a pretty bearish year, there could be a few key risks and waiting for exact details of proceeds raised and IPO Price might not seem to be a bad move after all.