Nam Cheong Limited - Did it not pay cash for the new charter vessel?

17/5/2013–Nam Cheong Limited has won US$241.1 mln worth of orders for 13 vessels sofar in 2013.

The Singapore-listed, Malaysia-based company just announced earnings for Q1 FY13:

Revenue: +14% to RM234.7 mln
Profit: +8% to RM35.8 mln
One-off gains/losses: RM2.8 mln vs Nil
Cash flow from operations: (RM85.1 mln) vs RM46.8 mln
Dividend: Nil
Order book: RM1.7 bln as at May 13, 2013

Shipbuilding revenue increased 17%, but chartering revenue fell 42% due to docking of its fleet for routine inspection.

Overall gross profit margin dropped to 19% in Q1 2013, from 23% a year ago.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Did it really not pay cash for the new charter vessel?

We are scratching our heads to figure out the mystery of Nam Cheong's newly-acquired charter vessel.

In the earnings report (page 13), the company said an RM86.5 mln increase in 'property, plant and equipment' was due to addition of a vessel to its fleet during the quarter.

But the cash flow statement (page 7) shows the company acquired 'property, plant and equipment' worth only RM406,000 during the quarter.

Therefore that leaves us wondering how did the company acquire a vessel worth at least RM86.5 mln (taking into account the depreciation and disposal of asset during Q1, the acquisition cost comes to around RM88.23 mln), but paying just RM406,000.

Question

2. What 'property, plant and equipment' did it sell in Q1?

According to the cash flow statement (page 6 & 7), Nam Cheong disposed of 'property, plant and equipment' for RM7 mln.

And it made a gain of RM2.8 mln on the disposal.

But it stopped short of disclosing what assets were sold, and why.

Question

3. What 'derivatives' is it referring to?

Nam Cheong recorded net fair value gain of RM2.6 mln on derivatives.

Interestingly, the company had RM77,000 worth of derivatives as on December 31, 2012.

And it didn't buy fresh derivatives during Q1 (as per the cash flow statement).

In other words, the company made a fair value gain of more than 30 times on its investment in derivatives.

That makes us all the more curious to know what derivatives are reaping such handsome returns.

Question

4. What does "consistent" really mean?

In the earnings report (page 12), the company said its gross profit margin from shipbuilding was 20% in Q1 2012, but has dropped to 17% in Q1 2013.

But in its review of performance (on page 13), the company describes the gross profit margin of 17% at its shipbuilding business as 'consistent'.

We've checked whether Nam Cheong might be referring to Q4 FY12 margins, but these weren't mentioned in the release.

But we've checked the Q4 FY12 margins, too, and found that the shipbuilding business recorded a gross profit margin of 18%.

If anything, this suggests that there has been a "consistent downtrend" in gross margins.

Question

5. Is it giving up margins to build-up the order book?

Shipbuilding margins have dropped from 20% in Q1 2012 to just 17% in Q1 2013.

The margins could be strained either due to rising costs and the shipbuilder's inability to pass that on to customers, or due to competitive pricing - by the shipbuilder - to win the orders.

While the management has not acknowledged either of the possibilities in the review of Q1 performance and commentary for the rest of the year, we wonder if Nam Cheong is giving up margins to win orders.

Question

6. Why did its income tax expense drop 92% despite higher revenue and profit?

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).


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