LON:RCG^J17 | RCG Results - Same Old Story : Writing IOU's

23rd Aug '10 by zakmundo

16 comments 6745 reads

RCG's results out today - its exactly the same story as before - except this time they've can't even print a rise in profits as well. Here are the key excerpts...

all figures in HK$

we start with RCG's fave number : Turnover up 0.15bn from 1.29bn to 1.44bn

but Cost of Sales also increased by 0.15bn from 0.63bn to 0.78bn

So profit to shareholders stays roughly flat.

And then a cursory look at the balance sheet shows the shame nasty story...

Total assets less liabilities up 0.7bn from 3.9bn to 4.6bn

Some of this comes from an increase in Intangibles of 0.28bn from 1.3bn to 1.44bn (due to the purchase of Strong Aim)

But the majority, as ever, comes from ..... Trade Receivables!!! up a massive 0.5bn from 0.8bn to 1.3bn

The irony this time is that RCG managed to massively expand trade receivables without a corresponding increase in turnover.

There is still no analysis of cashflow, turnover or profits of this guarenteed contract of Strong Aim or whatever it was called.

Lets look at Trade Receivables again - here is the table...

0-30days - down 70m from 271m to 147m
31-60days - down 78m from 219m to 141m
61-90days - down 52m from 182m to 130m
91-180days - up 428m from 161m to 589m
over 180 days - up 278m from 23m to 301m

Where did these come from? Its not just the ageing of the portfolio, otherwise the total result would have stayed the same. While a bunch of customers are not-paying, a whole bunch more (or maybe the same ones) are are not-paying some more.

Pathetic.

Z

and RCG also have the cheek to comment that they normally offer credit on 30-180 day terms....well an awwful lot of receivables is about to be out-of-policy then.

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deucetoace

23rd Aug '10

I just realised that I still have the 2006-2008 annual reports.

Under the Trade Receivables note to the accounts for all three years they state that they are "generally on 30-90 days credit terms". I know they have recently been dealing with more government related organisations but changing to 180 days maximum is a significant move especially for a company where cashflow has always been a worry.

zakmundo

One can only assume that the change in credit terms is the result of RCG having no choice.

Fangorn

1st Oct '10

Big drop in RCG today, down 13.3% to 30.75.

Not as of yet seen any RNS.......Any whispers about?

Edward Croft

I have to admit I've not been really keeping up with the story for a couple of years and I'm sure there are others who are better informed... but it's been an electrifying ride throughout. Here are some quick observations...

From the interims - the ballooning receivables (up HK$500m or so vs december) were apparently due to investment in the solutions business:

The Group's Solutions, Projects and Services sales in the first half of the 2010 financial year have continued to rise and this has resulted in longer accounts receivable days mainly due to longer project implementation cycles and the higher level of inventory holding required to meet project deliveries. Consequently, the Group's working capital requirement has increased in the period to HK$1,328.5 million (£112.0 million) (1H 2009: HK$952.8 million (£82.2 million).

As ever everyone wants to know where the cashflow is going to come from!

On the insiders front - note that the Offshore Group has been consistently dumping stock:

5 million sold on the 16th July to reduct to 20.49% - http://beta.investegate.co.uk/Article.aspx?id=201007161352054903P
5 million sold on the 21st September to reduce to 18% - http://www.investegate.co.uk/Article.aspx?id=201009211130030335T
Raymond Chu ex CEO, now Chairman, sold 5m on 22nd September to an 'institutional buyer'. http://beta.investegate.co.uk/Article.aspx?id=201009221030011020T
Anita Chau, NED, excercises 450k of options yesterday http://beta.investegate.co.uk/Article.aspx?id=201009301330026160T

For those that don't know - the Offshore Group is the holding vehicle of Bobby Chan who is the brother of the notorious (of Nina Wang fame) Tony Chan. Bobby was a founder of RCG before Raymond Chu (CEO) got involved and used to have 72m shares invested via Offshore in RCG at float (now down to 53m after this sale).

So Offshore Group, Chu and Chau dumping stock is a worry - has Bobby lost confidence in RCG or is it a personal matter that is requiring a forced sale? Tony Chan his brother was reported as being chased for $300m in taxes in Feb of this year relating to the Wang scandal - is that anything to do with the need for Bobby to dump RCG? http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=94045&sid=26928394&con_type=1&d_str=20100203&sear_year=2010

Now certainly, the whole Wang affair has cast a shadow over RCG, but when the founders and board members start dumping stock - as Alan Hansen would say - 'you gottae ask questions'. Either RCG is a contrarian play at a paltry valuation with forced sellers or the insiders know something and are getting out while they can. It certainly would take a brave man to bet his house here.

Appreciate the colour Edward. Think I'll give a spot of catching "the falling knife" a miss in this instance!

nigelpm

It certainly would take a brave man to bet his house here.

I'd argue it would take a brave man to bet "anything" on this horse.

There has been a great deal of insiders selling in the last few days, plus I guess the testing of multi-year lows is the final straw for those PI's still holding.

Trade receivables are now greater than 100% of market cap.

It seems they need to bring in a team that can focus on making people pay up. RCG is acting as an enormous credit line for their customers. Its very easy to for companies to ramp sales by handing out product on 0% financing or pay-nothing-for-6-months deals - it's not so easy to bring in the cash in hard times.

One has to worry about any company acting as an overdraft for it's customers! I don't know anything about the Asian banking situation right now, is this isolated to RCG or is everyone giving great terms to customers out there right now? Looking at RCG's accounts payable its not as if their suppliers are giving them the same terms!

HK$1,500m odd of A/R equates to a £122m credit line being given to customers. And read this from the interims...

The Group funds its operations with revenue from its operating activities. The Group also has cash inflow from interest income, collections from its customers, and also certain short-term trade financing facilities in place which can be utilised if required. Key drivers in the Group's sources of cash are primarily the Group's sales, and their inflow depends on the Group's ability to collect payments. There have been no material changes in the Group's underlying drivers during the period under review.

If their finance team can't bring in the cash that their sales team is supposedly teeing up for them, it doesn't look too good. Anyone got a credit line for a company that once promised so much?

On the other hand (yellow hat), how much of that A/R is bad debt? Can it really be £122m of bad A/R? I doubt it. And they do own £17m odd of property too. In theory the mCap should be covered enough by net Asset Value (Tangible Book Value was 65p per share at last results) and there aren't many creditors (even their suppliers wont give then them credit right now!) - so even on worst case scenario break up basis there is some cover. Would rather own secured debt right now than the equity, but it doesn't look like there is any. There wass about £5m of long term debt and £29m current liabilities at interims.

All a bit grim, but one would imagine some contrarian distressed asset specialists will be looking at this closely.

loglorry

I've written over and over again on TMF about this company. I'm now so bored of doing so I'll just say AVOID. Just look at how much has actually been returned to shareholders in the form of cash dividends. It is typical Chinese AIM rubbish that is best avoided.

While we are on the subject check out China-Biotics CHBT on the Nasdaq - this article is a really great read http://www.citronresearch.com/

I've been buying a few puts for fun. Problem is 50% of the stock is shorted so there is a real danger of a short squeeze even if they are due to go bust.

Log

marben100

Edward,

Whilst, as you know, I was very keen on RCG for quite some time, they seem to have quite a knack for not converting "profits" into cash on the balance sheet. First, the cash was used to fund acquisitions at high prices that, with the benefit of hindsight, seem to have been of dubious quality. Now cash is being absorbed by creditors and rats appear to be leaving... do I detect a rather pungent aroma? Rather pleased that I exited this quite some time ago, without taking too big a hit.

Over the years I have learnt to avoid companies that do not seem to be able to turn their profits into cash on the balance sheet. And especially those that offer extended credit to their clients (I guess that rules banks out too! :0)). Aero Inventory was a prime example of the former, needing regular cash infusions from shareholders to fund "growth", and Leadcom of the latter, that I can call to mind, though there have been many others. Fortunately, I managed to avoid these, despite the enthusiasm of other investors.

I have also found that corporate governance practices at Chinese companies make them very tricky investments, esp for westerners. My understanding is that Chinese business relies on a system of patronage that is impossible for the ordinary UK retail investor, without good local contacts and the ability to communicate in the native language, to make a proper risk-assessment of. Hence, I now prefer to get my China exposure indirectly.

Cheers,

Mark

djpreston

Hence, I now prefer to get my China exposure indirectly.

Very sensible Id say Mark.

Its an almost impenetrable market, not helped by the QII limits on the domestic A share market, which is where the really interesting companies are - as opposed to the SOEs. Thats why weve always used an A shares fund - in this case Martin Currie's as well as their dedicated hedge fund. Theyve been running domestic Chinese money for many years - one of, if not the first IIRC.

StrollingMolby

Thats why weve always used an A shares fund - in this case Martin Currie's as well as their dedicated hedge fund. Theyve been running domestic Chinese money for many years - one of, if not the first IIRC.

Seconded, DJP - it's well worth following the wider China team at MC, and especially Chris Ruffle & team who have unrivalled experience in China & Taiwan.

4th Oct '10

It's so long Raymond Chu as he and Anita Chau go non-exec.
http://www.stockopedia.com/shares/rcg-hldgs-ltd-LON:RCG/news/rns/101004rcg000471.htm/

zangdook

10th Oct '10

"So Offshore Group, Chu and Chau dumping stock is a worry"

But Chau bought stock. What she did with it afterwards we can only speculate. Or am I missing something?

12th Nov '10

Small share placing to raise £3.36 million

http://www.investegate.co.uk/article.aspx?id=201011120700110678W&fe=1

Commenting on the Subscription, Dato' Lee Boon Han, Chief Executive Officer of RCG, said: "We are delighted with the ongoing support of institutional shareholders, who have continued to participate in RCG's growth story via the Subscription. This demonstrates the institutions' support and confidence in RCG's future prospects."

Oh really.

I think what he meant to say was that he's pleased that investors recognise that unless they fund ongoing opex, the company will go bust faster than you can say "Where's the sales?"

RCG results - same old story : writing IOU's

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Zakmundo

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