Tuesday, April 21, 2009

China milk quarterly tabulation

I've some time at hand to crunch some numbers for China milk. I've always wanted to do that but never really got around to doing it. Here's the figures:



I didn't read through the whole annual report nor its business in details, so let's do it another time then. Here's a few thoughts:


1) Despite the s-share saga, there are some s-shares like China milk whose business are still very sound and the debts are not stacked sky high. A cursory look at the revenue and net profits shows that China milk is very much in business despite the tainted milk saga in China too. The business is doing well without the much debts too. Debt/equity ratio is pretty good and is much lower than that in FY07.


2) The cash and cash equivalent is growing bigger and bigger since 1Q07. China milk did not announced dividends but there are official announcement of China milk proposing to buy back part of their convertible bonds - the only long term debts in China milk's balance sheet. The details are quite beyond me, not very sure what they are talking about. But it's important to note that by doing so, they would have reduced their long term liabilities in their balance sheet (by how much, I'm not sure) and book a non-taxable accounting gain of US$654,600 or around RMB 4.5 mil. That is around 3-4% of the 3Q08 net profits.

There are of course questions regarding what is the use of this cash if the management did not distribute back as dividends to shareholders. I think besides buying back their bonds, they intend to get more dairy livestocks.


3) Is there a problems with China milk running into liquidity problems? Very unlikely. Their current ratio are off the charts, being so well bathed in cash. With their repurchase and subsequent cancellation of their convertible bonds, their liabilities will reduce further. We're talking about a very debt-free s-share over here.

18 comments :

musicwhiz said...

Hi LP,

China Milk's situation is similar to Pac Andes in that they are also buying back some of their LT debt at cheaper rates than face value. Analysts have estimated that for every $ of debt in PAH books, they are buying back at about 70-80c on the dollar, which means about 20c gets reversed as "other income".

Dr Convertible Bonds (Liability)
Cr Cash At Bank
Cr Other Income (reversal of liability)

This is an efficient use of cash to reduce debt. But buying back more and more of the convertible debt means the asking price for the remaining bondholders will be much higher (naturally).

Cheers,
Musicwhiz

Anonymous said...

Hi LP,

Interesting, but the moot question is whether the cash is there.

If a company does not have any plans for cash, it is better for it to give it back to its owner (i.e. the shareholder)

Regards

V

la papillion said...

Hi mw,

Yes, I read that pac andes is also buying back their debts. I think it's good because it lightens up the balance sheet. At least they didn't spend it on silly acquisitions in business that have nothing to do with their core e.g. C&G.

la papillion said...

Hi V,

Yes, it's still the most impt question. Even though china milk did not declare dividends, they use it on to reduce their debts by paying the bondholders with cash, so the cash (at least a portion) must be real, and not fictitious. Similarly, another s-share of mine, Hongguo, did not declare dividend but they are going to pass a mandate to purchase back their own shares. I suppose that it means they are gng to utilise part of the cash by buying back their shares from open market.

The scary ones are those that hold plenty of cash, didn't buy back their shares, didn't declare dividends and said nothing as to what the management are going to do with the excess cash.

Anonymous said...

Hi LP,

I went through the China Milk reports.

They have bought back 760 K USD of bonds (from the 300 million odd they have) i.e. 0.25%.

A famous cartoon strip named Peanuts is what comes to mind.

In contrast, 20 million USD is going to a joint venture, hmmm.

The other bond has been bought but with a put option (which can come back to haunt them)

Anyway, i do not have any CM shares, just thought i will let you know.

Unfortunately, the devil is in the details, rather than the announcement.

Regards

V

la papillion said...

Hi V,

Thks for your clarification regarding the bonds announcement. As mentioned, I've some difficulties understanding the details, so any help is good for me.

If 0.25% is bought back, then it is really a small % of the total outstanding. I'll have to rely on the 4Q and FY08's balance sheets to verify it.

Actually the whole thing about the ass-shares is actually a confidence crisis - if investors are not even sure the numbers in the financial statements are real, nothing can be relied upon already. I've learnt my lessons not to look for the proverbial needle in the haystack.

As I've mentioned, no more ass shares for me.

musicwhiz said...

Thanks V for pointing out that the CM repurchase constitutes 0.25% of outstanding convertible debt.

By contrast, for PAH case, it amounts to about 10.2% of the total original convertible debt.

Maybe it's because PAH does not have any M&A activities coming up, while CM does. CM should watch their cash and debt levels and allocate capital rationally and to shareholders' best interests*.

*Disclaimer: I have not gone through CM's ops in detail, this is just a general comment.

Regards,
Musicwhiz

la papillion said...

Hi V,

From what I understand from China milk’s various announcements, they had issued a principle amount worth of US$150,000,000 of zero coupon convertible bond due in 2012, convertible at a price of SGD $2). They wished to redeem a portion of the outstanding bonds, amounting to not more than US$40,000,000 (26.7% of the total amount). As a result, they called an invitation to tender for the bondholders who wishes to participate in it.

From the invitation to tender, China milk had cancelled US$3,000,000 worth of aggregate principal amount. The actual aggregate settlement is US$2,821,500, but let’s not worry about that now.

Besides that, China milk also repurchased bonds from the open market, amounting to an aggregate principal amount of US$800,000 and subsequently cancelled it. Again, the actual price paid for it is much lesser, at US$760,000.

As a result of both the bonds cancelled from the invitation to tender and the open market purchase, the total worth principal amount of bonds cancelled was worth US$3,800,000 (US$3,000,000 from invitation to tender and US$800,000 from open market purchase). Thus, the remaining outstanding bonds stand at US$146,200,000.

In other words, they had bought 2.53% (3,800,000/150,000,000) total bonds issued and not the 0.25% that you mentioned.

The other point that you mentioned regarding the joint venture.. I suppose you’re talking about the JV with Heilongjiang Animal Breeding centre? They are paying RMB 140 million, closer to USD 46 mil than the 20 mil USD figure quoted.

Am I getting it correct? Do enlighten me pls!

(Thks, you really made me patiently sit through and read all the various announcements!)

XuCloudy said...

Hi LP,

Nice tabulation..
but shouldn't it be FY09 compared to FY08?

The bond repurchased figures look accurate to me.

Just for discussion, since its an invitation tender, I do think that the small 2% registered bonds mean that the bond holders are quite confident in CM.
If there is no urgency, why should the Holders redeem the bond now, when they can redeem 116.82 by Jan 2010?

For me, the bond exercise in USD is a brilliant move by CM.
They will gain from weaker USD.
(if you compare the rate, you will get the idea).. Correct me if i am wrong..

Cheers;

la papillion said...

Hi XuCloudy,

Thks for visiting!

I think their financial yr is slightly off the calender yr, hence the discrepancy. Or maybe I read wrongly, too lazy to dig out the reports to see again, haha

I do agree with what you mean by the redemption. If I'm a holder of the bond, I too will hold till it matures. There's a chance of the stock becoming higher than the conversion price, so it's a win win situation, rather than cashing it out. Of cos, as you put it, it's really a vote of confidence here.

I'm just happy to see them reduce their debts :) I'm starting to suspect if their cash is really there, haha

XuCloudy said...

it should be FY 2009.
They ar gg to report Q4 2009 soon..

I am quite confident in CM.
At least they are still expanding and trying to clear their debt.

"The scary ones are those that hold plenty of cash, didn't buy back their shares, didn't declare dividends and said nothing as to what the management are going to do with the excess cash." << agree .. and yet trying to get the mandate to issue share.. really spinning my head round n round..

la papillion said...

Hi xucloudy,

Did they mention that they are going to get a mandate to issue new shares? I wasn't aware of that..any links?

XuCloudy said...

LP,
are we referring to the same counter?
i din refer to CM..

i refer to other Ash-Share..
They were tryin their luck to push thru the mandate to issue share but voted down.. (swt)

la papillion said...

Hi Xucloudy,

Oh i see. I thought you are referring to China milk :) Sorry for misunderstanding you, haha

Yes, I heard about the voting down of the mandate. I think they rightly deserved to be voted down.

XuCloudy said...

LP,

What do you think of CM FY2008 report?

I do think they should buy back share.

la papillion said...

Hi Xucloudy,

A bit disappointed. Balance sheet and cashflow looks good though, despite the bad income statements.

I'm worried about their milk business...it's not taking off as planned. Their core business of sperms are also taking a hit.

I guess in the near future, we'll be seeing more of such things. But as long as they stay solvent, I'm sure their business will do well. I'll wait it out.

XuCloudy said...

LP,

I am in different view.
The income statement is actually NOT bad..

I am wondering why Fair value Gain/Loss must be in income statement?
is it because there is no other place to put?

I agreed that Cost management was not done that well.
I am being paranoid that they are trying to squeeze more costs in FY2008, to get prettier figure in future.

My concern is more on their capabilities to expand and the reason behind the halt of their milk processing plant.

la papillion said...

Hi xucloudy,

I don't like their income statement cos even though revenue is all so great but the actual profit is not good.

Business wise a little worried too. Like you, I'm worried about their milk business. They mentioned they are gng to start a brand on their own...wondering if they are diworsefiying their business.

I'm not expecting them to do well in the coming few quarters.