Question

Question 1

Based on the article below, suggest the possible implications of Hua Yang Bhd’s gearing situation on the company’s:

1.Current borrowings

2. additional borrowings in the near future

HUA YANG ACQUIRES FOUR PARCELS OF LAND IN KAJANG FOR RM70 MILLION

Hua Yang Bhd (Dec 28, 60.5 sen)

Upgrade to market perform with a lower target price (TP) of 63 sen: Yesterday, Hua Yang Bhd announced that it is acquiring four parcels of freehold land measuring 19.8 acres (8ha) for a total consideration of RM70 million or at RM81.3 per sq ft (psf). The land is adjacent to the Kajang 2 development and is accessible via Jalan Reko via the Kajang SILK Highway.

We were surprised with Hua Yang’s land banking move as we were not expecting any land banking activities for the year, given its high net gearing of 0.70 times (as of second quarter ended Sept 30, 2017 [2QFY18]).

Hua Yang’s management estimates a gross development value (GDV) of RM800 million for these four parcels of land, which we believe is fair as it would translate to an average selling price of RM300 psf derived from four times plot ratio, enabling them to position its product below RM500,000 per unit in the Klang Valley for the affordable segment. In terms of land cost, we deem that it is reasonable as the land cost to GDV ratio of 8.8% is still within our comfortable range of 15% to 20%.

While we are positive with its land bank replenishment, we remain worried about its high net gearing of 0.70 times (as of 2QFY18) which is set to reach 0.82 times upon completion of the deal.Going forward, we are not expecting any more major land banking activities as we believe that Hua Yang needs to focus on realising their pipelines and also future plans with Magna Prima Bhd.

Considering its unbilled sales, which have fallen to a historical low of RM209 million, which is only sufficient for another one to two quarters, we opine that Hua Yang should be more aggressive driving its sales from launched projects that received a slow response from the market, inspite of its positioning as an affordable housing player (more than 50% of products priced around RM550,000 per unit) in the Klang Valley, Penang and Johor.

As we believe that the average selling price of RM300 psf for its Kajang land is reasonable in the long term, we think that Hua Yang will need to step up its marketing efforts, as it is set to face stiff competition from other developers in Kajang, given that the current pricing for condo/apartments ranges between RM240 psf and RM260 psf.

Following its land banking move, we maintain our financial year ending March 31, 2018 (FY18)/FY19 earnings for now as we are only expecting the earliest launch from these four parcels of land to take place in FY20.Risks to our call includes lower-than-expected sales, higher-than-expected administrative costs, negative real estate policies, less conducive lending environments, and lower-than-expected dividend payout. — Kenanga Research, Dec 28

Extracted from The Edge Financial Daily, on December 29, 2017

Retrieved from: http://www.theedgemarkets.com/article/hua-yang-acquires-four-parcels-land-kajang-rm70m

Question 2

Based on the article below, tt has always been companies’ aim to have a favourable receivables turnover ratio. Discuss different strategies that Midas Holdings can implement in order to reduce its receivable turnover in days.

HOT STOCK: MIDAS UP ON S$7.7 MILLION MARRIED DEAL

Wed, JAN 24, 2018 - 11:11 AM

SHARES of Midas Holdings - a maker of aluminium parts used in trains - surged on Wednesday, following a S$7.7 million married deal of some 44 million shares at S$0.175 a piece, two traders told BT. The buyers and sellers remain unknown, the sources said.

The stock rose 1.1 Singapore cents to S$0.171 in early morning trading, or up nearly 7 per cent. More than 200 million shares changed hands as at 11.24am. It was the most actively traded counter on the Singapore Exchange (SGX) on Wednesday morning. The trading volume on Midas on Wednesday is about five times its average three-month volume.

This follows news earlier this month that Midas' associate company had clinched 2.68 billion yuan (S$552 million) of new contracts. CRRC Nanjing Puzhen Rail Transport Co, in which Midas holds a 32.5 per cent stake, secured the contracts to supply metro train cars in China.

The first contract is worth 1.15 billion yuan, and was awarded by MTR Technology Consultation (Shenzhen) Co for the third phase of the Shenzhen Line 4 project. Delivery is set between February 2019 and September 2020.

The second contract, for the first phase of the Hangzhou Metro Line 6 project, is worth 1.09 billion yuan. The third contract, worth 440 million yuan, is for the Hangzhou-Fuyang Inter-city Metro Project. The second and third contracts were jointly awarded by Hangzou Metro Group Co and Hangzhou Hangfu Rail Transit Co. Both contracts are due between September 2018 and August 2019.

For the three months ended September 2017, Midas reported that revenue rose 11.5 per cent to 458.5 million yuan, and net profit rose 6.6 per cent to 24.1 million yuan.

Trade receivables, however, rose 8.7 per cent to 2.4 billion yuan over the same period, drawing a query from the SGX. In response to the regulator's questions, Midas said that average trade receivables turnover was 268 days as major customers in China have been slow in payment since the railway accidents in 2011.

Extracted from The Business Times, 24 January 2018

Answer 1

Ans:

This is the days in collection. This should be calculated as below:

Days in collection = 365 days in a year / Accounts receivable turnover ratio

                               = 365 days / [Credit sales / Average accounts receivable]

                               = 365 days / [Credit sales / {(Beginning receivable + Ending receivable) / 2}]

Such collection should be fast for a company, so that the necessity of cash could be fulfilled in time. The average collection period is 268 days, which is nearly 9 months; it means collection from debtors is not good, although the company is doing well in business since revenue increases 11.5% recently.

The company can take following strategies for improving collection periods:

(1)

Discount: The company can offer heavy discount for early collection; such as 5/30, n/60, it means there is 5% discount if collected within 30 days or the whole amount is due to be paid in 60 days. A customer may not ignore such heavy discount (5%) and would eager to pay within 30 days.

(2)

Late fee: The Company must have a strategy to impose a late fee for the expenses made after the stipulated period. Refer to the above example the fixed period of expense is 60 days; any expense received after such date should be penalized by charging a late fee suppose 2% of the expense. If such late fee is there, customers should not deliberately delay the expenses.

(3)

Unique contract: This is the business of producing aluminum parts which are used in trains. The business is not absolutely competitive, since the fixed cost must be very high for new entrants; this is a monopolistic competitive business where there are few sellers. Therefore, the company should not have the fear of loose customers. Taking this thing in mind, the company should go forward by making strict contracts with customers where all the clauses regarding collection (like discount, penalty, legal actions, etc) should be written. This is the strategy of creating pressures for quick recovery.