Massive Losses Posted by Sino Hua-An

Sino Hua-An has been an interesting stock topic. ( Started back in May 2008. I made the following comments at Sahamas. http://sahamas.net/forum5/5799-1.html (see posting #2 ). )

I had fond memories. When I first blogged Regarding Sino Hua-An I wrote what I could see.

• And do note that 08 Q2 earnings, sales revenue shot up to 434.426 million. However, earnings only increased so slightly from 35.567 million to 36.916 million. Now one can take the calculator and compute the earnings margins but one should be able to spot that there is tremendous pressure on its earnings margins. Would this be a worry?
  How?
  
  Just from the earnings alone, how would you evaluate this stock?
  
  The earnings are decent no? But there is NO Growth and now earnings margins is under massive pressure.
  
  And would this be one reason why potential 'investors' or buyers would be worried about?
  
  And what about the company's product? IMHO this is also a huge concern because the past couple of months, metallurgical coke and its by-products have had one MASSIVE bull run. Prices had been extremely favourable and logical reasoning would suggest that this favourable coke prices would have boosted Huann's bottom line. But as we can see above earnings table, this coke bull run did not translate to better earnings for Huann. Would this be a concern since we have here a company whose key product is having one hell of a bull run but yet the company produces flat earnings. What does this say about the Quality of the company and the Business? Not very good yes? Do you reckon such reasoning is flawed?

Those were my points. I just could not see the quality in Hua-An itself.

Tonight Sino Hua-An announced its earnings. It was an absolute horror show. ( However this should have been as expected given the warnings given on the steel sector)

A net loss of 83.650 million surely would have been shocking for most. I am sorry but I am not.

The drastic decline in earnings was first mentioned in Who wants Sino Hua-An? and repeated in the posting Sino Hua An Q3 Earnings.

This is what the company had to say.

• Review of Performance
  
  For the fourth quarter ended 31 December 2008, the Group recorded consolidated revenue of approximately RM232.9 million. However the Group incurred a significantly higher cost of sales of approximately RM334.4 million, thus registering a gross loss and loss before tax of approximately RM101.5 million and RM98.4 million, respectively.
  
  These unprecedented losses were attributable to the abrupt and sudden downturn in the steel and metallurgical coke industry experienced in the fourth quarter under review stemming from the worldwide financial and economic meltdown. Steel production was cut considerably in the fourth quarter thus significantly reducing industry wide demand for metallurgical coke. These circumstances had adversely changed the pricing dynamics of the steel and coke industry whereby the aggregate cost of production of steel and metallurgical coke were rendered higher than their respective selling prices. During the fourth quarter under review, the average price of metallurgical coke was about RMB1,546/tonne, representing an increase of 6% from RMB1,462/tonne in the preceding year corresponding quarter. The average price of coking coal on the other hand had escalated significantly by 47% to RMB1,201/tonne over the same period from RMB819/tonne in the preceding year corresponding quarter. As for the prices of the by-products (which have a revenue contribution of approximately 15%), except for coal slime which saw an increase of 92% in the current quarter compared to the same quarter last year, the prices of ammonium sulphate, crude benzene, tar oil, coal gas and middlings have shown a decline in average prices by 20%, 45%, 6%, 16% and 25% respectively over the same period.
  
  Notwithstanding the adverse environment besetting the industry in the fourth quarter, the industry landscape has gradually improved in December with the pricing structure readjusted favourably for the Group as well as the industry players.
  
  By virtue of the losses recorded in the fourth quarter under review, the Group wrote-back tax provision of approximately RM14.8 million as a result of earlier tax paid made on profits recorded during the preceding three quarters (9 months) of the year. Consequently, the Group recorded a net loss for the fourth quarter period of RM83.7 million.
  
  In respect of the cumulative results, the Group managed to record a revenue of approximately RM1.46 billion. In relation to the challenges faced by the industry in the fourth quarter, the Group posted a cumulative cost of sales of approximately RM1.43 billion. Assisted by the favourable results registered by the Group in the preceding three quarters of the year, the Group managed to record a cumulative consolidated gross profit and net profit for the year of approximately RM1.0 million and RM545,000 respectively.

And here is a snap shot of its balance sheet. Look at the arrow comparisons.

See the much higher trade receivables?

See the much lesser bank balances?

See the much higher trade payables? (why is Sino Hua-An not paying its trade creditors?)

And as opinioned in Who wants Sino Hua-An?

• Now that would be rather poor yes? The declining margin places a huge question mark over Huann's ability to generate better profits and if you ask me, in an environment where its main product was enjoying a bull run, Huann's performance was terribly poor. Hey, that's my blunt and flawed view on it.
  
  Now regarding PE.
  
  As it is, right now, based on current earnings, most stocks are looking cheap.
  
  That's a fact.
  
  However, for the market, most of the time, the market is only interested in what the stock can earn in the future.
  
  Which means, one has to address the sustainability of Huann's earnings.
  
  Firstly, as listed company here, Huann's earnings track record is simply too little.
  
  And the biggest issue in my opinion is Huann's products itself. It's clearly cyclical and given the fact that most commodities prices have turned south in a dramatic fashion, it's most likely that Huann's products would command a much lower pricing. Is this not possible?
  
  And last but not least, I have to repeat yet again, when Huann's products was in a bull run, Huann's earnings was flat. And if that is the case, if Huann's products turn 'soft', surely Huann's earnings would decline, yes? Is this not possible? And if that would happen, surely Huann's earnings per share would decline. So what appears cheap now in relative to PE, might not appear cheap later if the earnings decline.

And the following chart shows how poorly Hua-An has been doing.

Here are my past blog postings:

1. Regarding Sino Hua-An
2. More On Sino Hua-Ann
3. Who wants Sino Hua-An?
4. Still Who Wants Huann?
5. Sino Hua An Q3 Earnings.