Thoughts on Sheffield Green Ltd (Latest SGX IPO)

Sheffield Green Limited will be looking to raise $6 million via the Catalist board. With an aim to IPO on 30 October 2023.

Introduction

IPO Closing Date: 26 October 12pm

IPO Price Per Share: $0.25

Public and Placement Tranche: 3.6 million Public and 20.4 million Placement

Implied Market Cap: $46.6 million

Nature of Business: Human Resource Service for Renewable Energy Sector

Company Net Profit: 2.4 million USD for 1st 9 months of FY 2023. (FY is from July to June)

Assuming a 3.2 million USD Profit. This translates to an implied PE of 10.6

What i dislike about the company

1) CFO Credentials

It is fair to say that this is a new CFO that has just joined in November 2022. However, he does not have a very ideal portfolio.     

He was executive director for CW Group Holdings Limited from 2008 to 2018 (The company went bankrupt in 2020)

He was also CFO for Zheng Li Holdings from Jan 2016 to May 2019. While things were ok when he left, the company has went from 1.35 hkd in May 2019 to 0.11 HKD in Oct 2023.

It just feels like getting him is for the listing of the company. To be fair, CW Group Holdings has done decent while he was there. But it is just eerie things go bad after he left.

2) There is no need to list the company

With a net profit of possible 3.2m usd or around 4.38 million SGD, there is no need to raise just 1 year + of net income.

Looking at the balance sheet, the revenue recorded from June 2022 to March 2023 was 19 million. As such, i would not be too concerned with the receivable increase as i think that they have kept it well.

As such, it does not look like a balance sheet that needs extra funding to be listed through listing.

3) Key Man Risk

Kee Boo Chye is the CEO and i think whatever success is really due to his efforts. Having been in the oil and gas, marine industry since 2000 and doing manpower supply and human resource services business.

Moving into Taiwan in 2018 and Japan in 2021. This has definitely born fruits finally as the profits have come in. 

Unfortunately, what this means is that are the clients trusting him or his company? After all the company is newly established in 2021.

The key counter-argument is that he will still be the major shareholder with 72.88% of shares after IPO.

What i like about the company

1) Good Margins

The company's gross margins have jumped leaps and bounds with the increase in revenue. It seems like it is able to reap some economies of scale in this aspect.

Profit Before Tax Margin of 17.4% and Gross Profit Margin of 27.6% is incredible when considering the large increase in revenue and it shows that the company might not have hit the ceiling yet in terms of profitability increase.

2) Easy to understand industry exposure

As long as demand for renewable energy increase in Taiwan, there will be an increased demand for construction of various facilities and as such there will be a need to continue requiring staff as well as more staff and the company will benefit from such tail winds.

If we look at this picture, we can tell that there is still some massive potential and catching up to do if Taiwan (the main market of the company) wants to hit their targets. As such, they might need more of the services by the company.

3) Revenue Visibility

I can only infer that it means that the last quarter of FY 2023 should have at least 6.5 million and that would be good as the 1st 9 months revenue contribution was 19 million.

The food for thought

1) Customer Concentration

2 Customers stood around 72% of the company's revenue. While it is tough to tell who the customers are and whether they will continue to use their services, it is revealed that one does steel manufacturing / offshore wind farm construction while the other customer does coasting solutions for the marine, offshore and industrial sector in Taiwan.

As such, i am not really sure how much the company really benefits from the renewable energy boom in Taiwan as it seems like not all customers are from the same industry

2) Number of Staff currently

Looking at this, what i think is that the number has peaked after 31 March and from 31 March to 15 September, it has reduced from 777 to 583.

What this means is that revenue for FY 2024 might not be as high as FY 2023 for now. But we still have to consider that it is a large increase in FY 2022 to FP 2023 hence we are not sure how long the higher numbers of 818 have been maintained.

Concluding

The company has plans to set up a JV in US and capture revenue in Japan , France , Denmark and Poland.

Looking at how it took them some time to set up a footing in Taiwan, i would probably say it would take some time for them to capture similar success in other countries as well and it would be a very long term project. 

As this is a 'blue collar worker' focused company, i am not keen to call it a head-hunter company.

Looking at the Taiwan Offshore Energy Projects, it seems like there are quite some pipeline in the works and the expansion of wind energy is on the minds of the government.

Whether the company can capture the tailwinds of these offshore projects will be another question altogether.

Verdict

Potential of Growth: 5/5 (Taiwan is expanding offshore wind power projects)

Earnings Visibility: 1/5 (It is hard to tell if the company is doing well or not apart from macro trends of various country and their usage of specific renewable energy)

Valuation: 2/5 (Given that risk free rate is high now and this is not trading below 10 PE while HRnet is around 11 PE)

Conviction to List: 2/5 (Given that they are doing well and balance sheet is healthy)

Finishing the FY Well: 4/5 (I believe they will do well not considering the listing expenses)

Overall: 14/25 (Hit and Run on IPO Day or Sell on Result Release Day)

I think the current climate does not warrant for any long term holding of any small ipo as the required return is very high at the moment. Looking at how small caps seems to have little interest in the SGX, the expected return should be much higher.

However, looking at the improved financials, it could attract a few people to be onboard for this IPO and the renewable energy story in Taiwan is attractive as well. 

Just that it is hard to monitor how well this company is doing as its customer base has shown that a new customer can stand around 30+% of revenue while a recurring one is also 30+%. Which means that a lot really depends on the execution of the company and in finding new projects / clients.

(September 2023 Results) How i would invest in the singapore stock market if i had 100k of spare money

 

September 2023 Returns: 1.01%

Year to Date Returns: 21.15%

Since Inception (9 Sept 2020) Returns: 72.29%

Relatively Subdued September with not much happening to the portfolio. 

Nothing much to update either. 

Will await results of Powermatic in November as well as Centurion 3Q Update.

(August 2023 Results) How i would invest in the singapore stock market if i had 100k of spare money

August 2023 Returns: -6.12%

Year to Date Returns: 19.93%

Since Inception (9 Sept 2020) Returns: 70.56%

From July to August, the biggest positive mover in the portfolio would be UMS and Haw Par. 

The negative movers would be pretty much the rest with Huationg Global being one of the higher negative returns.

A lot of companies reported results. Some i have mentioned b4 so i will not mention again. I will just pick 1 that is good, 1 that is maybe and 1 that is bad to highlight upon.

Good: Haw Par - Interest Income (Possibily from T-bill) came in at 11m or 1/10 of the profit. Higher Dividend Income from UOB as well. Improvement in Tiger Bahm business as revenue rose but gross profit rose even more. 

Maybe: Centurion - Rental Revisions have not been fully priced in yet. I still believe that the best is yet to come. Perhaps the only worry is that the result looks bad because finance cost is up. But the margin expansion has been decent (more than revenue increase). As such, any increase in revenue from reversions should be directly to the gross profit hopefully.

Bad: Tuan Sing - Lower Hospitality EBITDA, Increased Finance cost, IPO in China halted with a view to purchase back previously sold shares. All thesis out of the window.

With that, i have decided to finally shuffle the cards in the portfolio. Probably the last? shuffle of the year.

I had a really tough time thinking how to shuffle this time around, it is not difficult with the removals

Propnex - I believe the good run has come to an end. 

KSH - Reduce Construction Exposure and looking at the China Property Crisis, i am becoming more skeptical of Gaobeidian doing well due to the fall in price as a whole in China. On the construction front, more companies are reporting lower margins. 

Tuan Sing - With the ipo potential gone, it is time to switch it out.

Added SUTL, good results , new management contract not sure how it will turn out we will observe but the growth in revenue and the interest income is encouraging

Added more Powermatic Data - My take from AGM is that the cogs should be slightly lower, longer term we have the property redevelopment theme so all is cool. Cash rich as well.

Added more Centurion - 2H should see core profits going higher. Interest Expense should have peaked or should not see any significantly higher increase from 1H. Which means bottom-line should finally pick up more pace.

I would have wanted to add some Hawpar as well but some how somewhere somewhat i just wanted to gamble a bit more on the others .............we will see how things pan out.

Some thoughts on my portfolio

 

(Somewhat accurate depiction when i try to think about the results of the stocks in my portfolio)

It is coming to the end of August and stocks in my portfolio have reported results. I will give my quick thoughts before giving a more detailed and very boring thought on individual companies.

Quick Thoughts

Dream International: Overall A-, the 65% profit gain , dividend and margin of plush toys is really an A+. The reason for its A- is that it guided for 65% profit gain in its positive profit announcement and it delivered exactly that (no surprises) and it's plastic figures segment fell slightly more than my expectations.

Huationg Global: Overall C. I have shared it on my facebook post here . The TLDR version is that margins are all over the place and it has missed my absurdly high expectations.

Mainland Holdings: Overall B. Despite a profit fall of 23% and EPS fall of 27%, this was within expectations as an interview in May/June 2023 has revealed that performances would be weaker and i was prepared to see a drop in revenue and profit. There are a couple of bright spots in terms of cash flow and some comments with regards to the business operations. All in all a B Grade.

Portfolio Thoughts

In terms of keeping them on the portfolio, it is a completely different story. I actually am thinking of selling all 3 actually. 

The main reason is opportunity cost. I do not see any of them having any significant rise in share price in the following 6 months. They will unlikely be reporting any results and unless there is significant ownership or coverage, is unlikely to see any appreciation in share price. 

Any meaningful rise in share price will be unlikely this year and perhaps will only be seen if they manage to do well in the 2H 2023.

But at the same time, a factor that is putting me off is that if i were to do this, i will have to put in some large effort to research companies to put the conviction on, after all this is one of the rare few times in the past few years where certain parts of my research actually was somewhat accurate.

Which then again, when you do new research into companies, you are usually unsure if your research and estimations / expectations will tally with the results as well as what the market expects.

Going back to the basics of finance 101.

1) Dividends are declared by the company,

2) Profit and Revenue is determined by the operations of the company as well as the demand supply factors affecting the company

3) Share price is decided by folks who actually want to own these shares.

I will probably need some time to think about how desperate i want to hit my aim next year and whether these companies can do it or i should try my hands at a new company.

Detailed Thoughts

1) Mainland Holdings

My view is that results should get better or at least i should start to see more intersegment revenue for 2H and we will then reassess across 2H 2023 and 1H 2024 if the margins start to improve.

Given that a new plant was completed and the amount of staff actually decreased, this is somewhat a shock as it goes against the common sense of manufacturing. As such, i would like to see how the margins . According to online sources, the factory was completed somewhere around late April or early May hence the 2H 2023 should start to see this factory going into productions.

Probably 2 calls for concern was that A) the Mexico base would incur higher cost than expected,

Initially in March the estimation was 6.75 million USD

In July the contract price was 12.11 million USD

B) Financing cost has doubled.

In terms of balance sheet analysis, i think these 6 months have been good cash generation

Total liabilities decreased more than total assets. Cash position increased while borrowings and payables have seen a decrease. Receivables and Inventory have also decreased.

Overall i would say it is good for the cash flow. Although i still cast my queries on how financing cost has doubled.

I am not sure what reactions the market might have but i will probably wait to see if there are any news articles or interview that is released with regards to the 1H 2023 results before assessing further.

2) Dream International

It is strongly advised that the my previous detailed writeup is read before reading on.

I have mentioned about the strength of the plush stuffed toy segment due to theme park and it has indeed worked out. Much better than i thought

The EBITDA Margin for Plush Stuffed Toys came in at 30.17%. This is the highest in the past 3-4 years.

Looking at the geographical breakdown, we can easily ascertain that most of the margin contributions should come from Japan and China. This is because the increase in plush stuffed toys segment coincides with Japan and PRC revenue increase and to a small extent, Hong Kong.

My initial thoughts after the seeing the results are

1) Are the margins sustainable?

2) What were the main factors in making these margins so high?

3) How far are the orderbooks being placed (as such to estimate the certainty/ uncertainty)

4) Was revenue increased in Plush Toy Segment as a result of production or rise in prices?

5) How lean are operations? Are the segments interchangable for the plants?

Q5 popped up as i read this.

As usual, i went to email the Dream Investor Relations to see if i could get a reply. The summarized reply is as follows

1) Many parts of production process are interchangeable between segments. Currently Plush Factories is higher than Plastic ( which means that Plush is actually more labor intensive and as expected)

2) Theme Park Sales to Asia are of high quality and as such have better margins. Stable Raw Material Cost was also a crucial factor.

3) Increase of over 30% in production volume for Plush Stuffed Toys imply that the price increase if any was minimal.

4) Orders are placed 4-6 months before shipping date.

Therefore, the focus on raw materials and Asia theme park performances will continue to be crucial. In my previous analysis i have mentioned on it as well.

Previewing Dream International 1H 2023 (Unlikely to be Good) (Deep Dive)

Dream International is currently my 2nd largest position in my portfolio this year.

After gathering various sources of information, i will be sharing my view with regards to its upcoming results. The TLDR Version is that i think it will not be good but i will hold onto it putting my faith in the teddy bears.

As Dream International usually releases its profit guidance on 2nd to 3rd week of August and its Half Year Results at the last week of August, we will see if there is any guidance as well this time around.

The company has a spectacular record of releasing either a positive profit alert / profit warning as per the table below.

Financial Year	Profit Announcement
2022 1H	Positive (3x in Net Profit)
2021 1H	Negative (43 – 53% fall in Net Profit)
2020 1H	None but Profit fell 30%
2019 1H	Positive (Considerably Higher but % Not Mentioned)
2018 1H	Negative (Considerably Lower but % Not Mentioned)
2017 1H	Positive (Amount not mentioned)
2016 1H	Positive (Amount not mentioned)
2015 1H	Positive (Amount not mentioned)
2014 1H	Negative (Amount not mentioned)

Looking at stats, 5 Positive 4 Negative, we can bet on it being positive... oh wait no its not Baccarat sorry.

Introduction

Dream International is a global toy manufacturer that manufactures plastic figures and plush stuffed toys. Its plants are in Vietnam and China.

At end of 2019, it has 4 plants in China and 15 plants in Vietnam. 

At end of 2022, it has 7 plants in China and 20 plants in Vietnam.

Perhaps an interesting stat is that in 2019 revenue is 3.9 billion HKD while 26717 staff is being hired.

In 2022, revenue is 6.2 billion HKD while 28924 staff is being hired.    

In terms of the Plastic Figure Segment, the most notable customer would be Funko

In terms of the Plush Stuffed Toy, the most notable customer would be Disney

In terms of the revenue spread, the 2 major segments revenue and profit is as follows

As such, we can conclude that 2022 had a much higher margin and in terms of profit, plush stuffed toys has overtook plastic figures in 2021. 

In fact, revenue has kind of peaked in 2022 2H for plastic figures compared to its amount in 2021 2H.

Some of its ratios that i just plugged off from Stockscafe.

Why i believe results might not be good

1) Funko Depression

The elephant in the room is probably Funko, Although it has recorded an increase of contribution from 1.6 billion HKD in 2021 to 2.1 billion HKD in 2022, Funko has reported its 1H 2023 results and while it was already expected to be bad, there was a downwards revision of around 10% of revenue.

In its earnings call, management has spoke about ordering less as its strategy for now as it is trying to digest inventory and to avoid over inventory problems as it wrote off inventory in 1Q 2023.

This replicates what Dream International mentioned in their FY as customers might have inventory pressures.

In my own analysis, i estimated that around 27 to 35% of Funko's sourcing is from Dream International. While on Dream's end, Funko accounts for around 34% of its revenue.

In fact, in recent years, the movement in additional orders from Funko has been same direction as its Dream's revenue from Funko.

As such, in 1H 2023, the estimated addition is 283 Million USD, which is 40% lower than 2022 1H addition and as such we can estimate a similar fall in revenue as well from Dream's Plastic Figures Segment.

To prepare things for the worst, i emailed Dream hoping to get a reply on whether the reduced orders are from other partners or does it include Dream as well. Fortunately i got a reply but unfortunately it is not good.

2) Bad export data from Vietnam

1 critic of my research from an interviewer is that i tend to not include macro analysis. As such, i went back and crunch some figures to find some macro numbers.

Unfortunately, Vietnam's exports classify toys as under the segment of 

'Toys, games and sports requisites; parts and accessories thereof'

As such, a pure figure cannot be achieved but at least a reference can be achieved and it paints the same negative story as US Exports is down -25%. While EU has recorded a good increase, Dream has very little revenue to EU so while it can be done, it would be something out of the data.

I went to crunch a bit more numbers to see if the story matches in 2021.

While not exactly the same magnitude, the increase is quite apparent. As such if i look at export numbers, i estimate at least another 25% fall from Funko and US in general. Once again it tallies with part 1.

If by now you can still read on further and want to know why i would be holding it till at least the results or any guidance is announced, do read further 

Points of Optimism or just Chicken Soup

1) Oriental Land Boomz

Oriental Land is the operator of Japan Disneyland and Disneysea. As mentioned previously, it is a key customer of Dream. In fact, Dream's revenue to Japan has doubled from 490 million in 2021 to 1.1 billion in 2022.

In fact, the revenue from its 2nd largest customer (Believed to be Disney) increased from 480 million in 2021 to 1 billion in 2022.

Dream has also attributed the growth to theme parks welcoming crowd. Fortunately this looks like it has kicked on to a higher level in 2023.

I pulled out Oriental Land's Inventory level and merchandise revenue for 1H 2023. Both of which are significantly higher than 1H 2022. A figure i forgot to include was Jan 2022 to March 2022 but it is around 18214.

As such, merchandise revenue at Japan Disney in 1H 2023 was around 72000 while in 1H 2022 it was around 42000. An increase of more than 50%.

Looking at this and the higher inventory level, i believe there will be seep through impact to Dream.

The caveat to this analysis will be

1) How much capacity is available to produce more bears

2) Export figures do not indicate any double digit increase to Japan

For Point 1, i believe there is still ability to raise the production as utilization rate is only 80%.

There is also the option of doing overtime.

For point 2, there is no rebuttal but the category is too wide to be specific, for what we know badminton rackets could have reduced demand as folks decided to go for China made ones. Also we have to think if the increase in China Plants could be the one that exports to Japan instead.

2) Positive Results from USS and Sega

Perhaps to a much lesser extend, Dream does produce for USS and Sega as well.

(I had to google to find out this was Anpaman from Sega?.

(I believe so...maybe its bandai but my research shows that Sega is a customer either way)

I am much more certain on Sega but less so for USS (Although in a human rights report 2012, it has been reported that Dream does produce for China and Japan USS Disney)

As such, from Comcast's theme park segment which is Universal Studios, we can see that there is a rebound in revenue.

Currently results look good for Apr to Jun 2023 for Sega. Jan to Mar 23 also came in at 46% higher revenue.

Overall, the Japan Sentiments looks strong.

3) Dream Vietnam Operations Information

By now my head would have hurt trying to process the info, but that's investing on a deep dive basis and it is to assess the pros and cons.

Sometimes googling the company's factories brings wonder after using google translate. I am always happy to be able to find more information even if the information might be 1) Misleading. 2) Irrelevant to the grand scheme of things. 3) Give too much Chicken Soup Assurance. After all, it is up to the reader to interpret the information read.

To do a layman version, we go from the top to bottom.

1st Google Dream Plastic Ninh Binh as it is a subsidiary found on the Annual Report of Dream International.

Yup i saw Dream International Logo hence it is the right company.

 I found this article on Dream on 8 Feb 2023 published in a vietnam news portal. Glad to hear that there has been no major retrenchment or layoffs which is common when demand is low.

Another information found indicates hiring of 200 staff when the previous reported is 1000. Hmm that is some food for thought but i am always glad that a factory is hiring compared to a factory that is not hiring.

Conclusion

As an opportunist who wants to flip the prata for a good results and make gains and run road, i would not have picked Dream International for the upcoming flipping as the elephant in the room is that Funko is the headwind.

If i were to look at the segment profits, margin has been dominant in the teddy bear segment and this relates to the theme parks which has been strong.

Company wise, it has been hiring despite the Funko drop in revenue and possibly orders from Dream.

The last time Funko had lower revenue, Dream posted an overall drop of revenue as well but it was less than 10%. In fact, Dream's revenue has been increasing from 2018 to 2022 with 2020 being the exception.

Profit was the bigger issue as raw materials cost affected profit in 2021 and 2020, as such despite higher revenue in 2021 compared to 2019, profits is more than 50% down.

A possible reason will be the price of PVC, price of PP and price of ABS. All of which commonly used in toys.

All of which showing a higher level in 2021 compared to 2023.

Given the analysis of the above, knowing the plastic figures segment will have lower revenue, it is up to the company to see if they can source for new customers to that segment as well as optimize to improve the margins.

I am hoping the teddy bears work wonders and cover the shortfall from plastic figures. With an investor relation that actually bothers to reply, i am somewhat more inclined to hold it longer.