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  • Solargiga (757.HK) - Attractive Bet

    Company's announcement in 2013

    Having been a long-term supplier of ingots and solar wafers to Sharp Corporation, China-based Solargiga Energy Holdings has signed a new deal to produce 370MW of PV modules in 2013, making Solargiga, Sharps largest PV product supplier. Solargiga said that it had originally been a supplier of solar ingots to Sharp for nearly a decade, which expanded to include solar wafers and solar cells. However, the newly signed module supply agreement was actually more than double Solargiga's actual module production capacity. To meet Sharp's module supply needs, Solargiga would adapt a commissioning process to allow the Group's production capacity and quality to meet the expected demands. Earlier in May 2013, it had announced it is already virtually sold out for the year with annual monocrystalline silicon solar ingot production capacity of approximately 1.2GW; annual monocrystalline silicon solar wafer production capacity of approximately 900MW, while the annual capacity of solar cells and modules stood at approximately 300MW and 150MW, respectively

    Investment Rationale

    1) Solargiga share price is suppressed by its 2012 financial results

    Solargiga had exceptionally poor performance in 2012. The EPS was -0.55 while share price is just about 0.4. It recorded a loss attributable to the equity shareholders of RMB1,276.554 million, in which 705,415 (55.3%) million come from impairment on prepayment, goodwill, intangible assets, property, plant and equipment. The turnover was RMB 996.836 million, and Cost of sales represented 129.2% of total turnover. The increase in ratio was mainly due to the further inventory provision made during 2012.

    The above accounting treatment including aggressive impairment and inventory provision were largely driven by bad global solar industry. It is believed that Solargiga would not need to do similar impairment and provisions in 2013.

    2) Solargiga's Cashflow and Equity fund raising activities.

    Solargiga had raised HKD 427 million since Nov 2012. The total fall short of current asset to current liability was 385 million by the end of 2012. Solargiga should have sufficient cash to continue its business. Serial cash raising activities had suppressed the share price in historical low level.

    · May 16, 2013 - Solargiga raised HKD 80 million by subscription of new shares at 0.36 per share.

    · Jan 15, 2013 - Solargiga raise HKD 254 million by offering shares 498,260,094 on the basis one Offer Share for every five existing share at price 0.51.

    · Nov 4, 2012 - Solargiga raise HKD 93 million by offering 249,130,047 on the basis one Offer Shares for every nine existing share at price 0.375.

    3) Solargiga and Japan

    Solargiga said that monocrystalline wafer production capacity were fully booked for 2013 due to the strong demand in Japan and China. Solargiga has exceptionally strong customer base in Japan when compare to its key competitor Comtec (712.HK). According to IHS report, Japan's solar installations jumped by "a stunning 270% (in gigawatts) in the first quarter of 2013." By the end of 2013, there will be enough new solar panels equal to the capacity of seven nuclear reactors. Such massive growth will allow Japan to surpass Germany and become the world's largest photovoltaics (PV) market in terms of revenue this year. Japan is forecast to install $20 billion worth of PV systems in 2013, up 82% from $11 billion in 2012. The phenomenal growth that started the year is expected to continue throughout 2013 as demand for solar energy is forecast to double, making Japan the world's largest market for PV installations on a revenue basis for the first time in a decade. Japan's share of global PV system revenue will rise to 24 percent in 2013, up from 14 percent in 2012 and just 9 percent in 2011. Solargiga should be strongly benefitted by Japan's Mega Solar wave, and it is being asserted by a few company's announcement.

    Earning Surprise is expected for Solargiga for 2013, and the news should be announced in late July or earlier August 2013. The share price is now 0.42, and I expect the share price would be increase sharply in June and July 2013.

    Risk

    Liquidity problem

    As stated in 2012 financial statement, Solargiga was required to accelerate a repayment of long term debt because of the breach of maintenance covenants. This is one of the risk Solargiga were suffered from cash shortage in 2012. There might be some pressure for Solargiga to further raise fund through further raising of bet or equity.

    Poor Corporate Governance

    Solargiga had records of poor corporate governance. This can be seen in its recent actions (3 time in 6 months) to raise fund, which seriously dilute interest of existing share holders.

    Valuation

    By using comparable P/S, I anticipate that the price of solargiga should be $1.6 (vs $0.41)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: Solar
    Jun 14 12:40 AM | Link | Comment!
  • Looking For Short Ideas On Hong Kong Listed Consumer Discretionary? – Try 210.HK Daphne

    This is the first article of my series intending to cover the gap in coverage on equities listed on the Hong Kong Stock Exchange, as I have noticed the primary focus of Seeking Alpha articles on equities are focused on the US and the UK markets.

    Daphne International (210.HK)

    My focus in this article is on Daphne International (210.HK), a significant market player in the footware and apparels industry of the consumer discretionary sector. The footware and apparels industry are dominated by a couple of players according to market capitalization, namely Belle International (1880.HK), Stella Holdings (1836.HK), Daphne International (210.HK) and C.Banner (1028.HK). Together these companies comprise over 96% of the listed footwear and apparels industry. Below is a snapshot of the key numbers of these stocks as of 23 April 2013.

    Daphne (210.HK) - Historically a growth stock

    Daphne International has, since its inception in 2000 on the HK stock exchange, a growth stock and over the past ten years has maintained consistent growth in gross profit (though volatile) at around 25% for the past ten years. Breaking the growth of gross profit by its components, one would naturally expect the growth of total turnover would be in line with COGS. But this has been proven to be not the case according to the latest results announced in Daphne's 2012 annual report, where the growth of COGS is greater than growth of Total turnover by 6.9%, as shown in Chart 1 below.

    Daphne's costs of high growth strategy - High inventory levels, low inventory turn

    According to Daphne's AR in 2011/2012, Daphne has greatly expanded its retail outlets across the whole of the China, focusing on direct-managed stores, anticipating a market upturn in 2012, evidenced by the increase of retail outlets from 4,547 stores at end of 2011 to 5,427 stores at the end of 2012. Also, it can be seen that the actual inventories were double up from 1,084 M as at 2010 to 2,058 M in 2011. From an interview with Daphne's staff, 20 production lines were added into shoes manufacturing in late 2011. The actual demand, however for Daphne's products are grossly over estimated. As a result, inventory levels amounted to 2,369 million as of end of 2012, a record high level for the company. One would argue that a higher number of retail outlets naturally will increase inventory levels, but on an average inventory per retail outlet basis, average inventory per store has increase by approximately 75% since the 2nd half of 2010. Clearly the expansion strategy and production of footwear in anticipation of more market demand did not eventuate, and in the end become accumulation of stock (possibly obsolete), at the various retail outlets.


    Heavy discounting policy - not a populist tactic

    From my research at various Daphne stores, Daphne has a history of using aggressive discounting strategies at end of season to promote sales and getting rid of old stock. However, it is generally known in the industry that the aggressive discounting strategy is actually not popular in fashion. If a shoes brand was ever sold at deep discount, customers would treat the deep discounts as the "norm", and it will be very difficult for Daphne's shoes to be sold at normal prices, given the average consumer will wait for the deep discounts at the end of each season.

    According to annual result presentation, 2013 Strategy would not resolve above problems. Another bad year is expected.

    Daphne would continue to expand numbers of stores and cut cost. It will strengthen sale operation management to frontline to invite bigger sales. However, it did not address the core problem directly i.e. excess inventory piled up. Daphne's management would like fixing the inventory problem through more stores and turnovers by integrated the synergy from frontline operation management. Simply speaking, this is actually has no different to Daphne usual strategy at all but just integrating the enhancement of sales person productivity into the overall strategy. The effort should work in longer run with high operating cost persist. There is more direct method to reboot operational efficiency: the Daphne should cutting of production, laying off staff, closing out non-profitable point-of-sales and written-off non-sellable inventory.

    Recommendation

    Short the stock until the Daphne successfully reduces its inventory pile-up and revitalizes the Company's operations.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 27 5:39 AM | Link | Comment!
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