Highway Holdings Limited — Form 20-F Summary
Reporting period: The filing is an annual report for the fiscal year ended March 31, 2016, not a standalone 2015 Q4 report. It does not provide separate fourth-quarter financial results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars; amounts below are in millions unless stated otherwise.
Business context
Highway Holdings manufactures metal, plastic and electronic parts, assemblies and products for OEM customers, primarily in Europe. Its main manufacturing operations are in Shenzhen, China, with some assembly in Yangon, Myanmar through a 75%-owned subsidiary. The company completed the transfer of its remaining Shenzhen operations from the former BFDC arrangements to its wholly owned, PRC-registered subsidiary during fiscal 2016.
Key financial metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $22.935 | $22.373 | +2.5% |
| Gross profit / margin | $5.928 / 25.8% | $5.717 / 25.6% | +$0.211; +0.2 percentage points |
| Operating income / margin | $1.516 / 6.6% | $1.271 / 5.7% | +19.3% |
| Net income attributable to Highway shareholders | $1.251 | $1.150 | +8.8% |
| Basic and diluted EPS | $0.33 | $0.30 | +$0.03 |
| Operating cash flow | $1.256 | $4.223 | Down $2.967 |
| Cash and cash equivalents | $9.140 | $9.727 | Down $0.587 |
| Working capital | $10.657 | $11.016 | Down $0.359 |
| Total assets / total equity | $17.039 / $11.934 | $16.987 / $12.233 | Assets broadly stable; equity down |
| Long-term debt | None | None | No bank loans or borrowing facilities reported |
Current ratio was 3.10:1 at March 31, 2016. The company paid $1.364 million in dividends during the year and declared $0.40 per share for fiscal 2016. A further $0.10 per share was paid on April 18, 2016. Cash flow from operations was positive, but substantially below the prior year, reflecting increased receivables and lower payables, partly offset by reduced inventory.
Material changes versus prior year
- Sales recovered from a 2.5% decline in FY2015. Management attributed FY2016 growth to higher orders from several major European customers and replacing a customer that ended its relationship.
- Product mix shifted toward Electric OEM: its share of sales rose to 55.2% from 44.0%, while Metal Stamping and Mechanical OEM fell to 44.8% from 56.0%. Electric OEM operating income increased to $0.916 million; metal/mechanical operating income was $0.738 million.
- Europe represented 71.2% of sales, up from 67.7%. The three largest customers accounted for 70.3% of sales, compared with 60.7% in FY2015.
- Operating income rose as gross profit improved and SG&A declined slightly. Lower currency losses ($21,000 versus $125,000) helped, while income tax expense increased to $243,000 from $134,000 and the effective tax rate rose to 16.0% from 10.4%.
- Myanmar operations were consolidated for the full fiscal year following the acquisition of a 75% interest in Kayser Myanmar in March 2015. The company reports that approximately half of assembly operations had shifted there, while manufacturing remained in Shenzhen during FY2016.
Outlook, management commentary, risks and unusual items
- Management expects to shift more assembly work, and potentially some component manufacturing, to Myanmar to counter higher Shenzhen labor and operating costs. It says available cash and internally generated funds are expected to cover working-capital and capital needs for at least 12 months, including planned equipment purchases and facility moves.
- This is not formal numerical guidance. The company had planned expenditures for Myanmar expansion and relocation/refurbishment of Shenzhen operations. The Shenzhen lease extension through February 2020 was agreed in principle but remained unsigned and subject to government review; expected annual rent was approximately 13% higher.
- Key risks include customer concentration and credit exposure, rising Chinese wages and regulatory/tax costs after the restructuring, customer approval and execution risks in Myanmar, and uncertainty over Myanmar facility relocation. The top three receivable balances represented 69.2% of year-end receivables.
- Other material exposures include dependence on the Long Hua factory, labor shortages and turnover, raw-material and customs-deposit requirements, currency fluctuations (the company does not hedge), transfer-pricing scrutiny, and political, legal and regulatory uncertainty in China and Myanmar.
- FY2016 included a $117,000 write-down of property, plant and equipment. Currency exchange loss was $21,000; there was no gain on disposal of property, plant and equipment, compared with a $110,000 gain in FY2015. No material pending legal proceedings were reported.
- Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2016. The auditor’s report did not attest to internal-control effectiveness. The filing also describes limits on PCAOB inspection of audit work relating to PRC operations.
Most important facts for investors to verify
- Confirm the fiscal-year reporting period and obtain quarterly results separately; this filing does not give standalone Q4 2015 results.
- Track whether major customers maintain orders and whether the customer concentration and receivables exposure increase or ease.
- Verify execution, customer authorization, costs and realized savings from the Myanmar shift, including relocation plans and facility lease arrangements.
- Assess cash conversion and working capital, particularly the increase in accounts receivable and the sharp decline in operating cash flow.
- Confirm execution of the Shenzhen lease extension and quantify rent, relocation and refurbishment costs.
- Monitor the sustainability of dividends relative to earnings, cash generation and planned investment.