Highway Holdings Limited — FY2012 Form 20-F
Reporting period: Fiscal year ended March 31, 2012. This annual filing covers the full fiscal year, not a standalone 2011 fourth quarter. Financial amounts are in U.S. dollars unless noted; statement amounts below are in thousands.
Business context and financial performance
The company manufactures metal, plastic and electronic components and products for OEM customers, primarily in China, Europe, Japan and the United States. Its manufacturing is concentrated at one Shenzhen facility. Financial statements are prepared under U.S. GAAP.
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $25,370 | $31,147 |
| Gross profit / margin | $5,121 / 20.2% | $6,553 / 21.0% |
| Operating income / margin | $230 / 0.9% | $1,726 / 5.5% |
| Net income attributable to shareholders | $184 | $1,650 |
| Basic and diluted EPS | $0.05 | $0.44 |
| Operating cash flow | $644 | $2,005 |
| Capital expenditure | $355 | $1,027 |
At March 31, 2012, cash and cash equivalents were $5,575, plus $643 of restricted cash; working capital was $10,221 and total assets were $16,579. Total equity was $11,998. Long-term loans were $374 ($262 current, $112 non-current), capital-lease obligations were $3, and short-term borrowings were zero. The company reported $2,570 of available credit under its DBS facility.
Changes versus prior year
- Sales fell 18.5% ($5,777), reflecting fewer orders from established customers, including work shifted to Mexico and to a lower-priced supplier. Shipment volume declined about 14%; average selling price declined 4.5%, mainly from product mix.
- Metal stamping and mechanical OEM sales declined 20.7% to $14,689; electric OEM sales declined 15.3% to $10,681. The metal segment lost nearly $5 million in orders from a major customer.
- Gross margin contracted 0.8 percentage points amid higher labor and China operating costs. Average wages per employee rose about 14%; the Shenzhen legal minimum wage had increased 67% over three years.
- SG&A was nearly flat at $4,891 despite lower sales, increasing to 19.3% of revenue from 15.5%. It included one-time reorganization-related employee relocation and additional customs costs.
- Effective tax rate rose to 50.3% from 7.0%, attributed principally to one-time reorganization and asset-transfer taxes. A $126 currency gain partly supported non-operating results.
- Operating cash flow decreased to $644. Cash declined $1,289 to $5,575, mainly as financing cash outflow—including $1,058 of dividends and debt repayments—exceeded operating cash flow.
Outlook, risks and unusual items
- Management expected lower sales in FY2013 as the mobile-phone-cover customer shifted most production to Mexico. It expected some recovery in orders from existing customers, but not enough to offset that loss; European financial uncertainty and customer sourcing changes remained concerns.
- The company converted Nissin HK’s operations to a wholly foreign-owned PRC subsidiary in 2011. The new structure brings additional permits, taxes, compliance and administrative costs; unrecovered VAT on imported materials adds approximately 4% to material costs. Hi-Lite was still operating under a BFDC arrangement, with its continuation beyond the stated June 2012 deadline uncertain.
- Leases for the sole Shenzhen manufacturing complex were due to expire February 28, 2013. Renewal, and the landlord’s agreement to a smaller leased footprint, were not assured. Relocation could be costly and disrupt operations.
- Management said operating costs, especially labor, were expected to rise and was exploring moving or outsourcing labor-intensive work to lower-cost Asian countries. No such arrangement had been finalized.
- Key exposures include dependence on a few customers (three represented 52.8% of FY2012 sales), concentrated receivables (the three largest balances were 81.3%), competition and pricing pressure, RMB appreciation, labor shortages and regulation, and dependence on one factory. The company does not hedge foreign-exchange exposure.
- Several Nissin Shenzhen employees had filed labor-injury claims. Management expected favorable decisions and recorded no provision at year-end. The filing reports no other material pending legal proceedings.
- The company paid a $0.20-per-share dividend in FY2012 but declared no further dividends during the year; future dividends are discretionary. Management stated that cash and available facilities should fund needs for at least 12 months, while warning that unanticipated relocation or regulatory costs could strain resources.
Important facts for investors to verify
- Whether FY2013 customer orders recover, and the realized revenue and margin impact of the Mexico transfer and other customer sourcing changes.
- Progress on PRC operating compliance, actual tax/VAT and labor-cost effects, and the status of Hi-Lite’s BFDC arrangement.
- Renewal terms for the Shenzhen facility leases, the amount of space retained, and any relocation costs or disruption.
- Customer concentration, receivable collections and credit quality, including the high year-end concentration among the largest receivables.
- Operating cash generation, cash availability (distinguishing restricted cash), debt repayments and the sustainability of dividends.
- Audit and control context: Deloitte Touche Tohmatsu gave an unqualified opinion on the consolidated financial statements; management reported internal controls effective, but the filing had no auditor attestation of internal controls and disclosed limits on PCAOB inspections of audit work in China.