Swing Media Technology Group Ltd - MANAGEMENT REPLY: How did inventories and receivables rise when sales were flat and production was down?

19/6/2015 – Swing Media Technology Group Ltd expects to remain profitable in FY16.

In its outlook statement, the company said:

'The market for data storage media has remained demandable. Due to industry consolidation in last two years, which has weeded out the weaker players, margins are still healthy, especially for products such as dual-layered DVD-Rs. The Group’s ancillary products such as stampers, plastic resins and chemical dyes are still experiencing good demand.'

The company recently announced the following earnings for FY15 ended March 31:

Revenue: +0.5% to HK$1.1 bln
Net profit: -19.7% to HK$66.8 mln
One-off gains/losses: (HK$4.7 mln) vs Nil
Cash flow from operations: HK$53.2 mln vs HK$81.1 mln
Dividend: Nil vs 0.15 Singapore cents per share
Order book: Not disclosed

Its trading sales rose 3% to HK$254.1 mln, DVD-R sales rose 0.5% to HK$663.6 mln and leasing income increased 9.3% to HK$146.2 mln.

However, sales of its 'lower-margined' CD-Rs fell 33.9% to HK$35.0 mln.

The company's pre-tax profit increased by 1.6% during the year.

However, its net profit was lower by 19.7% due to a tax expense of HK$2.6 mln compared to a write-back of HK$14.9 mln in the previous year.

During the year, the company recorded a loss of HK$4.7 mln on disposal of some property, plant and equipment due to relocation of its factory in Hong Kong.

On page 11 of the earnings announcement, it said 'Due to the expiration of the rental contract, the Group has moved its factory in Hong Kong to a smaller premise with a new 5 years rental contract in October 2014. And about half of its production lines were moved to Taiwan for continuous production. Thus, leasing income on the machineries also increase during the year.'

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

Question

1. What property, plant and equipment did it sell on relocation of factory in Hong Kong? And why?

The company sold property, plant and equipment for HK$8.3 mln at a loss of HK$4.7 mln.

In the notes to the earnings report, it said that the property, plant and equipment were sold at a loss due to relocation of the factory in Hong Kong.

However, it didn't disclose any further details.

Also, any reasonable investor would wonder why the company couldn't relocate such worthy assets to the new site instead of selling them at only two-thirds of their value.

And who was the buyer(s)?

Management replyThe loss is a book loss arising from the difference between book cost & net sale price. What has not been captured is the tremendous value we have obtained from these assets over the years which we have been on these premises. Moreover, any assets which are of economic use have already been relocated. The other assets are fixtures and other immovable items. The buyer(s) are unrelated parties who will be utilizing the old premises for different purpose.

Question

2. Why could it not renew the lease for the old factory premises in Hong Kong?

Companies generally don't shift premises in such hasty and undeclared manner.

We wonder why Swing Media Technology Group Ltd couldn't renew the lease for its old factory premises.

Management replyThe relocation of our factory was not made suddenly. We had already planned this well in advance of the expiry of our rental contract. The strategic decision was made early to concentrate more of our production capabilities in Taiwan as it will reap greater economies of scale. However, the Group retains a smaller manufacturing facilities in Hong Kong to cater to some customer needs.

(Read the full story to get all 9 questions and answers)

We thank the management for the replies.

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