Highway Holdings Limited — FY2020 Form 20-F
Reporting period: Fiscal year ended March 31, 2020; this is an annual report, not a standalone 2019 Q4 filing. The company manufactures metal, plastic and electronic components and assemblies for OEM customers, with operations in Shenzhen, China, and Yangon, Myanmar. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $12.558 million | $14.277 million |
| Gross profit / margin | $4.153 million / 33.1% | $3.580 million / 25.1% |
| Operating income (loss) | $747,000 | ($755,000) |
| Net income (loss) attributable to shareholders | $686,000; $0.18 per share | ($630,000); ($0.17) per share |
| Operating cash flow | $442,000 | ($437,000) |
| Cash and cash equivalents at year-end | $8.827 million | $8.827 million |
| Working capital | $8.235 million | $8.271 million |
| Total assets / equity | $18.169 million / $10.918 million | $15.250 million / $10.137 million |
- Revenue declined 12.0%, mainly due to reduced orders from major European customers and COVID-19 disruption. Fourth-quarter sales were 23% below the comparable quarter.
- Gross profit rose 16% despite lower revenue. Management attributed much of the margin improvement to a $148,000 Shenzhen rent subsidy, a $7,000 electricity rebate, $141,000 of sublease income, and use of inventory written down in FY2019; it also cited lower manufacturing costs as production shifted to Myanmar.
- SG&A fell 21.4% to $3.406 million, reflecting lower headcount, bonuses and management salaries, partly offset by share-based compensation.
- Net cash used in investing activities was $64,000; net cash used in financing activities was $297,000, primarily dividends. The cash-flow statement reports an $81,000 increase before an $81,000 adverse exchange-rate effect, leaving year-end cash unchanged.
- The company reported no outstanding bank loans and no bank credit facilities. At year-end it had $2.816 million of operating lease liabilities, including $782,000 current and $2.034 million non-current. Management said available working capital and operating cash flow should fund operations for at least 12 months.
- FY2020 dividends declared were $0.08 per share ($319,000); the dividend was paid April 6, 2020. Future dividends remain at board discretion.
Material changes and operating developments
- Revenue fell from $19.166 million in FY2018 to $14.277 million in FY2019 and $12.558 million in FY2020. The company returned to profitability after FY2019’s operating and net losses.
- The company continued relocating labor-intensive manufacturing from China to its 84%-owned Myanmar subsidiary. Its Yangon factory was fully operational; about 55% of FY2020 revenue was still generated from Shenzhen production.
- Europe represented 78.0% of FY2020 revenue. Two customers accounted for 69.0% of revenue; the five largest customers accounted for approximately 89.3%.
- Adoption of lease accounting increased reported assets and liabilities: at March 31, 2020, operating lease right-of-use assets were $3.710 million and lease liabilities were $2.816 million.
Outlook, risks and unusual matters
- Management expects COVID-19 to affect sales and operations for an uncertain period. Shenzhen operations were disrupted by closures and restrictions; Myanmar’s factory closed for most of April 2020. Management could not quantify future effects.
- Key risks include dependence on a small number of customers, customer credit concentration, rising labor and regulatory costs in China and Myanmar, and the possibility that customers will limit or prohibit Myanmar production. China–U.S. trade tensions, foreign-exchange movements, labor shortages and uncertain local legal and regulatory systems are additional risks.
- The company has no currency hedges. It reported a $7,000 currency gain in FY2020 and noted that the RMB weakened about 7% against the U.S. dollar over the year, while Kyat appreciation increased Myanmar costs.
- China severance liabilities accrued at March 31, 2020 were $1.167 million. A mass layoff or relocation could trigger significant cash payments. The Myanmar factory depends on a 50-year lease; the company prepaid $950,000 of rent, representing about 12 years’ payments.
- Management identified material weaknesses in Myanmar cash controls, accounting staffing and transaction/documentation procedures. It concluded internal control over financial reporting and disclosure controls were ineffective as of March 31, 2020; remediation was underway but not complete.
- The auditor relationship changed twice: Deloitte was dismissed in January 2020, Gumbiner was appointed and later dismissed after it could not complete the audit on time, and Centurion was appointed in July 2020. Centurion issued an unqualified opinion on the FY2020 financial statements; its report did not express an opinion on internal controls.
- No material pending legal proceedings were disclosed. The filing describes no bank borrowing, but notes the absence of credit facilities as a liquidity risk.
Important facts for investors to verify
- Whether the reported margin improvement persists after the identified subsidies, sublease income and inventory effects.
- Recent sales, order trends and customer retention, particularly given the 69.0% revenue concentration in two customers and ongoing COVID-19 uncertainty.
- Progress and independent validation of remediation of the Myanmar internal-control weaknesses, including cash controls and accounting staffing.
- Myanmar production economics, customer approvals, labor costs, and the security and enforceability of the factory lease and prepaid rent.
- Cash availability and liquidity under a prolonged downturn, considering the lack of bank credit facilities, lease obligations and potential severance payments.
- Auditor transition history and the implications of PCAOB inspection limitations for audit oversight.