Highway Holdings Limited — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2019. The supplied filing is an annual report, not a standalone 2018 Q4 report. Financial amounts below are U.S. dollars; unless stated otherwise, amounts are in thousands.
Business context
Highway Holdings manufactures metal, plastic and electronic components, subassemblies and products for OEM customers. It operates primarily in Shenzhen, China, and Yangon, Myanmar, through an 84%-owned Myanmar subsidiary. The company is shifting labor-intensive production to Myanmar while retaining engineering, tooling and automated manufacturing in Shenzhen.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $14,277 | $19,166 |
| Gross profit / margin | $3,580 / 25.1% | $6,742 / 35.2% |
| Operating income (loss) / margin | $(755) / (5.3%) | $1,938 / 10.1% |
| Net income (loss) attributable to shareholders | $(630); $(0.17) per share | $1,550; $0.41 per share |
| Operating cash flow | $(437) | $2,388 |
| Capital expenditure | $695 | $271 |
| Cash and cash equivalents at year-end | $8,827 | $11,267 |
| Working capital | $8,271 | $10,864 |
| Total assets / total equity | $15,250 / $10,137 | $18,130 / $11,790 |
Revenue fell 25.5%. Gross profit declined $3,162, and the company moved from operating and net profits to losses. Cash declined by $2,440 during the year. Management attributed the cash reduction chiefly to the Myanmar facility transition, including rent prepayment, refurbishment, construction and equipment relocation.
Liquidity remained positive: the reported working-capital ratio was 2.63:1. The company reported no outstanding bank loans and no long-term debt, but said it had no bank credit facilities available for unexpected funding needs. Cash dividends paid were $1,244; the filing reports four FY2019 payments totaling $0.35 per share, while the equity statement shows dividends declared of $950, or $0.25 per share. These are different measures and should be checked against the notes and payment dates.
Changes, outlook and material items
- Management attributed the sales decline to lower orders from major European customers, fewer tooling orders, customer inventory adjustments, reduced sales of higher-margin products, and customers moving production away from China. The company said it did not attract enough new customers to replace lost business.
- Gross margin weakened amid lower volume and overhead absorption, fewer tooling orders, inventory provisions and asset write-downs. SG&A fell 9.8%, but rose as a proportion of sales to 30.4% from 25.1%.
- FY2019 included a $419 inventory write-down, $233 impairment of property, plant and equipment, and a $77 impairment of Myanmar goodwill. The company also recorded a $28 gain on equipment disposals and an $8 foreign-exchange loss.
- Management expected to continue moving production to Myanmar and increase automation in China, believing this could reduce costs and improve margins. It cautioned that revenue in the year ending March 31, 2020 could continue to decline. Management believed available working capital and cash would fund needs for at least 12 months, based on its internal projections.
- Kayser Myanmar’s new Yangon facility became operational in 2019. Its 50-year lease involved a $950 rent prepayment, described as approximately 12 years of rent, and roughly $500 of refurbishment and construction spending. The landlord is owned by two Myanmar citizens connected to Kayser Myanmar, including a 16% Kayser Myanmar shareholder and manager.
- The Shenzhen factory leases expire in February 2020. Renewal depended partly on obtaining a government high-technology designation; failure to renew could require relocation, disrupt operations and trigger potentially substantial employee severance payments. The company said it had accrued employee termination liabilities.
Principal risks and contingencies
- Customer concentration is high: the five largest customers generated 89.4% of FY2019 sales; three customers represented 76.9%. The largest customer alone accounted for 47.7%. Receivables were also concentrated, with the three largest balances totaling 78.2%.
- China labor, rent, regulatory and compliance costs have pressured competitiveness and contributed to customer losses. Myanmar introduces execution, labor, infrastructure, political, regulatory, currency and customer-acceptance risks; some customers have declined Myanmar production.
- Foreign-exchange exposure is unhedged. The company receives revenue in several currencies and pays operating costs in RMB and Myanmar kyat; currency changes can affect margins and reported results.
- Operating lease commitments were reported at $4,116, including $2,983 due in 2024 and thereafter; purchase obligations were $1,303, all due in FY2020. The company expected to recognize a lease right-of-use asset of about $1,181 and lease liability of about $231 upon adoption of the new lease standard on April 1, 2019.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2019; the auditor did not attest to internal control effectiveness. The auditor issued an unqualified opinion on the financial statements. The filing also notes that PCAOB inspection access for audit work related to China operations was limited.
Most important facts for investors to verify
- Whether the Shenzhen leases were renewed on acceptable terms and whether the required high-technology designation was obtained.
- Whether Myanmar production transfers produced the expected cost savings, customer approvals and order growth, and whether the Yangon facility and long-term rent prepayment create any related-party or operational concerns.
- Subsequent revenue, margins, operating cash flow and customer orders, particularly given the concentration in a few customers and management’s warning of possible further sales declines.
- The composition and timing of employee severance liabilities, lease commitments and other cash requirements, and the company’s ability to fund them without credit facilities.
- The reconciliation of FY2019 dividends paid ($1,244 and $0.35 per share) with dividends declared ($950 and $0.25 per share), and whether dividends continued after the reported loss.
- The assumptions supporting inventory and long-lived-asset valuations, the Myanmar goodwill impairment, and the auditor-inspection and financial-reporting risks disclosed in the filing.