Tsit Wing International

March 2009


Tsit Wing International thought it had woken up to smell the coffee when it started hedging against higher coffee prices by going long in futures contracts. But its hedging scheme went wrong as coffee prices went south instead in the second half of last year. The mistake cost Tsit Wing HK$8.1 million in hedging losses for FY2008.

Tsit Wing subsequently reported a decline in FY2008 net profit, burnt cash on operations and declared a lower dividend. OCBC thinks that despite the lower dividends, Tsit Wing still provides a consistent yield, but Westcomb does not think Tsit Wing will do well in such an uncertain economic climate.

The coffee and tea supplier's FY2008 revenue rose 11% to HK$402.4m. But its net profit dropped 44% to S$20m, as the price of coffee beans was volatile and fluctuated by as much as 65%. Its hedging activities to soften the volatile coffee prices backfired as the prices of coffee beans fell sharply in the second half of 2008, resulting in a hedging loss of HK$8.1m for the year.

It burnt HK$14.7m in cash on operations compared to the HK$28.7 mln the previous year, mostly due to higher receivables and inventories. Tsit Wing declared a dividend of 2.5 HK cents. This brings its total dividend for the year to 6 HK cents, lower than its previous year’s dividend of 7.5 HK cents.

OCBC – HOLD – S$0.22
OCBC has a HOLD call on Tsit Wing with a fair value of S$0.22.

The analyst was expecting Tsit Wing to declare a total dividend of 7.5 HK cents instead of 6 HK cents. He thinks Tsit Wing cut its dividends to conserve cash in light of the global credit crunch. But OCBC thinks Tsit Wing’s margin pressure will soon ease.

A promising sign is the company's Q4 gross profit margin gaining 2.6 percentage points to 36.1%. Still, Tsit Wing will take some time to get rid of its inventory of raw materials that it bought during the commodity boom, as reflected in its high level of inventories amounting to HK$73.2m. In all, OCBC likes the group's consistent dividends.

Westcomb – SELL –S$0.155
Westcomb has a SELL call on Tsit Wing with a target price of S$0.155. It thinks Tsit Wing's FY2009 revenue will decrease, but its gross profit will go up.

The analyst thinks the slowdown in the global economy and lower coffee prices will lead to a 4% decline in turnover to RMB 386.9m for Tsit Wing in FY2009. According to the International Coffee Organization, coffee prices have fallen by about US$1.15 per pound last July to US$0.80 in February.


But the lower price of coffee could lead to higher gross profit margins. Westcomb now expects Tsit Wing's FY2009 earnings to grow 8.1% to HK$21.6m. But a caveat – Westcomb is not sure whether its assumptions will hold true in such an uncertain and challenging economic climate. It thinks Tsit Wing's value should be at a P/B of 0.6x, and at S$0.155.

China operations
With so many negatives to be found in Tsit Wing's FY2008 performance, an encouraging sign can be found in its operations in China. Operating profit in the PRC improved from HK$2.4m in FY2007 to HK$3.5m in FY2008. However, the China operations still account for less than 20% of its overall operating profit.

Tsit Wing stated in its outlook statement that it considers China its key engine for growth after assessing the market's long-term business potential. Analysts surveyed by Reuters have on average a HOLD call on Tsit Wing with a target price of HK$1.11.

As always, please see your licensed financial advisor before making any investment decisions.

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