Latest / Investor Exchange / Khong Guan Limited Condensed Interim Financial Statements January 2025

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Khong Guan Limited Condensed Interim Financial Statements January 2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:07
  Welcome to this deep dive where we try to break down complex info into the crucial insights for you.
• 0:14
  Yeah, hopefully making sense of it all. So today we're looking at a really interesting
• 0:18
  story, actually. It's the financials of Kongwan Limited.
• 0:21
  For the six months ending, January 31, 2025, they've done more than just bounce
• 0:28
  back. They've swung from a loss last year to a profit.
• 0:32
  A pretty significant swing, too. It definitely makes you want to know what's going on under the hood.
• 0:36
  Exactly. What happened and, you know, what might it mean going forward?
• 0:41
  Well, we've got their official numbers here, the condensed interim financials.
• 0:44
  So profit and loss, balance sheet, cash flow, the usual suspects,
• 0:49
  plus the notes. Right. The notes that explain everything.
• 0:52
  Yeah, exactly. So the plan is to unpack this positive shift,
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  figure out what really drove the better performance.
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  And maybe get a sense of the outlook. That's the goal. And we'll try to keep
• 1:02
  the jargon to a minimum. Think of it as understanding the mechanics of this recovery.
• 1:07
  Okay, sounds good. So let's jump right in. Those headline figures comparing
• 1:10
  this first half of 25 at the same period in 24, revenue first.
• 1:14
  Yep, revenue is the place to start.
• 1:16
  Overall, Kongguan saw, well, a pretty healthy increase. It was 9.3%.
• 1:21
  Okay, 9.3%. 3%. Up to what?
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  Up to $38.72 million.
• 1:26
  That's compared to $35.41 million last year. Right. And what's really driving
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  that? Is it across the board or?
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  It seems the real engine here was their main operating subsidiaries,
• 1:36
  the ones in Malaysia. Ah, okay. Let's unpack that then.
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  So Tonguan Food Products, TGF. That's the one. TGF saw an 8.5% increase.
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  Their revenue hit $22.22 million, up from $20.48 million. And the other one,
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  Sui Hinchan Company, SHC. SHC did even better, actually.
• 1:53
  An 11.0% rise. So $15.61 million compared to $14.05 million previously. Wow.
• 2:00
  Okay. So Malaysia is clearly key. What specifically fueled that growth?
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  You mentioned TGF. Yeah. For TGF, the report points to a couple of things.
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  Stronger sales of a leading beverage brand they distribute.
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  Sounds like they expanded their market coverage there. And also improved sales of a.
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  Popular cooking ingredients brand. Plus, and this is important,
• 2:19
  the Malaysian ringgit appreciated against the Singapore dollar.
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  Ah, the currency effect. So that boosts the numbers when they report in SGD.
• 2:25
  Precisely. It gave their reported revenue a bit of a lift, shows they had some
• 2:29
  success pushing into that market. That makes sense.
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  Currency always complicates things or helps sometimes.
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  And SHC, even stronger growth there.
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  Yeah, SHC. They benefited from higher sales of starches and other ingredients.
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  And like TGF, that stronger ringgit helped their figures too against both the
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  Singapore and the U.S. dollar this time. Okay.
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  But they also mentioned expanding their product range. Ah, new products.
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  Seems like it. And also entering new market segments within Malaysia.
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  So it sounds like some proactive strategies are paying off there.
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  So putting it together, strong sales in Malaysia helped by maybe some smart
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  strategy, market expansion, and, you know, a bit of a tailwind from the currency.
• 3:11
  That seems to be a really big piece of the puzzle, yes. But that's the top line, the revenue.
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  What about the bottom line? That's where the real turnaround story is, isn't it? Absolutely.
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  The profit attributable to equity holders, they reported $564,000 for the six months.
• 3:27
  Compared to? Compared to a loss of $545,000 in the same period last year. Wow. Wow.
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  That's a over a million dollar swing. It is. It's quite the reversal.
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  So what did it what were the key things that pushed them from red to black?
• 3:41
  Well, it looks like a few factors kind of lined up. First, those Malaysian subsidiaries
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  we just talked about, SHG and TGF. Yeah.
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  Their combined net profit after tax was up by $201,000 compared to last year.
• 3:53
  So that revenue growth definitely flowed down. OK, so core operations improved.
• 3:57
  What else? Second, they had way less drag from their short term investments.
• 4:01
  The fair value loss was only $82,000 this time. Only $82,000? What was it before?
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  It was a hefty $260,000 loss last year.
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  So that's a big improvement, maybe a more stable portfolio, or just better market
• 4:14
  conditions for whatever they're holding. Right.
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  Less of a loss is always good. So better core ops, better investment results. Anything else?
• 4:21
  Yes. And this is pretty significant. The results from their associated companies.
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  Their associates, like companies they own a chunk of. Exactly.
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  Their share of profit from those associates jumped to $524,000.
• 4:34
  Up from? Up from only $145,000 profit in the prior period.
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  And what's really interesting here, remember SG protein?
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  Vaguely. They were maybe losing money before. They were. But in this period,
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  Kong Kwan didn't report any further share of losses from SG protein.
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  It looks like the previous losses were, you know, fully absorbed or accounted
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  for. Ah, so stopping those losses alone would boost the overall associate contribution quite a bit.
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  A major turnaround within that part of their business, definitely.
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  Okay, so it sounds like a few things came together quite nicely,
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  and I assume this all flowed through to earnings per share. It did, precisely.
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  Basic and diluted EPS came in at 2.1 teen cents.
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  Compared to the loss last year? It was a loss per share of 2.11 cents.
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  Yeah. So yeah, it really shows that tangible improvement for shareholders.
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  Okay, top line up, bottom line, swung to profit, EPS positive.
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  Let's look at the statement of financial position now, the balance sheet.
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  Any clues there that support this story? Shifts in assets, liabilities.
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  Yeah, looking at assets, total assets did creep up a bit to $69.21 million from
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  about $65.6 million. Okay.
• 5:41
  Anything specific driving that? Two things really stand out.
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  First, trade receivables, the money customers owe them.
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  That jumped quite a bit. How much? To $14.50 million from $12.01 million.
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  The company says it's because of higher sales volumes just before Chinese New Year.
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  Right, that makes sense. More sales, more invoices waiting to be paid,
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  temporarily at least. Exactly.
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  And other receivables also increased to $493,000 from about $300,000.
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  Yeah, that was... Mainly due to share application money paid to that associate,
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  SG Protein, the one that stopped reporting losses.
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  Ah, okay. So connected to that investment story. Seems so. And overall investments
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  in associates also ticked up slightly, reflecting their stakes.
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  Okay, so assets reflecting more activity and investment. What about the other side? Liabilities.
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  Liabilities also increased. Total liabilities went up to $10.83 million from
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  $9.66 million. And the main driver there.
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  Primarily trade payables, money they owe suppliers. That rose to $8.94 million from $7.72 million.
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  And again, linked to that pre-Chinese New Year activity.
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  Seems likely. More purchases to support the higher sales. So yeah,
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  both sides of the balance sheet kind of reflect that increased business tempo. Right.
• 6:54
  Okay. So balance sheet shows more activity. Now, cash flow. Stepment of cash
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  flows sometimes tells a slightly different story than just profit, right?
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  How's the cash looking? Yeah, it's interesting. Net cash used in operating activities
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  actually increased slightly.
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  They used $569,000 this period compared to using $612,000 last year. Huh.
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  Used more cash from operations, even with higher profit. How does that work?
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  It can seem counterintuitive, yeah. But it often comes down to working capital
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  changes. Remember those higher receivables? Ah, right.
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  They haven't collected all that cash from the increased sales yet.
• 7:27
  Exactly. And maybe they paid suppliers a bit quicker or bought more inventory.
• 7:30
  So profit is up, but the actual cash generated from day-to-day ops was slightly
• 7:36
  negative in this period.
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  Okay, that's a really important point. Profit isn't always cash in the bank
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  immediately. What about investing activities?
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  They generated a bit of cash there. Net cash from investing activities was $229,000.
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  That's up a little from $211,000 last year. What was the main source?
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  A key bit was dividends received from an associate.
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  That came in at $327,000, slightly up from $309,000.
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  So some cash return from those investments. Got it. And financing activities,
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  loans, dividends paid out, that sort of thing. Big change there.
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  Net cash used in financing dropped significantly.
• 8:12
  Only $104,000 used this period. Compared to?
• 8:16
  Compared to $342,000 used last year. And the main reason is pretty simple.
• 8:20
  No dividend paid this time. Exactly.
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  They didn't pay an interim dividend this period, whereas they paid out $258,000
• 8:26
  in the same period last year. Okay, so adding it all up, operating cash used,
• 8:30
  investing cash generated, finance and cash barely used. What's the overall cash impact?
• 8:35
  Overall, their cash and cash equivalents went down by $444,000 during the six months.
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  So despite the profit turnaround, cash position dips slightly,
• 8:46
  mostly due to that working capital tied up in higher sales activity.
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  That seems to be the story that cash flow tells, yes. It gives you that extra
• 8:54
  layer of understanding. Definitely.
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  Now, the report also breaks things down by business segment.
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  What does that show us? Right. Two main segments.
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  Segment one is the core business, trading wheat flour and consumer goods in
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  Singapore and Malaysia. And that's where the action is. Absolutely.
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  That generated almost all the revenue, $38.75 million.
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  And it reported a PBITDA, its profit before interest, tax, depreciation,
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  and amortization of $909,000.
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  So clearly profitable on an operating level. Very much so. It really highlights
• 9:25
  that the core trading is driving the positive results.
• 9:28
  And segment two. Segment two is trading and holding shares, both quoted and
• 9:32
  unquoted, again, in Singapore and Malaysia. So the investment side.
• 9:35
  Sorted, yeah. It didn't have direct sales revenue, but it did bring in $15,000 in dividend income.
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  Overall, it showed a PVITA loss of $131,000 for the period.
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  And you also have to remember there are intersegment transactions eliminations
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  that happen when they consolidate everything. Okay.
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  But the big picture from the segments is.
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  Core treating good, investment holding side, less so, at least on that PBITDA
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  measure. That seems fair, yeah.
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  All right. So we've looked at the numbers, profit, balance sheet, cash flow segments.
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  Let's try to pull together the why.
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  We've touched on pieces, but what are the key positive drivers for this better
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  performance? Okay, consolidating it.
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  Number one, definitely the stronger sales performance in those Malaysian subsidiaries.
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  That combination of market penetration, specific product success,
• 10:23
  and, you know, the helpful exchange rates, that was huge. Right.
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  Number two, that big improvement from associates, especially SG Protein not
• 10:30
  dragging things down anymore, that provided a really significant boost to the overall bottom line.
• 10:34
  And third, those reduced losses from the short-term investments.
• 10:38
  Less of a headwind there compared to last year. Yeah. So it really sounds like
• 10:41
  a mix of getting their core operations humming nicely in Malaysia and getting
• 10:46
  a better handle on or maybe just better luck with their investments and associates.
• 10:51
  I think that sums it up well. Yeah. Those three things together really explain
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  that swing into profit. OK.
• 10:58
  But it's rarely all sunshine and roses, is it?
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  The report also talks about challenges, the outlook. Even with a good half year,
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  what headwinds are they seeing? Yeah, they're quite clear about the challenges.
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  They acknowledge the consumer landscape, particularly in Malaysia and their
• 11:13
  export markets, is, well, tough.
• 11:16
  Inflation, weaker spending. Exactly. Persistent inflation is hitting consumer purchase and power.
• 11:21
  That could obviously dampen demand for their products going forward.
• 11:24
  Makes sense. What else? The usual global uncertainties.
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  Geopolitical stuff, trade policy shifts. These things create volatility.
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  Supply chains can get disrupted.
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  Foreign exchange rates can swing unpredictably. They have to manage all that.
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  Always tricky. And competition.
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  They mentioned increased competition, which, you know, could squeeze their pricing
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  power and potentially impact margins.
• 11:45
  Right. And you mentioned the Malaysian ringgit helped them this period,
• 11:48
  but that can cut both ways, can't it? It's a classic double-edged sword.
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  If the ringgit weakens significantly against the Singapore dollar in the future,
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  that would hurt their reported results, reversing the benefit they saw this time.
• 12:00
  Okay. They also specifically call out a challenging competitive environment
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  for one of their associates, United Malayan Flour, particularly in oats and cooking oils.
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  So potential pressure there, too.
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  So good results now, but definitely keeping an eye on several potential challenges ahead.
• 12:18
  How do they plan to, well, navigate this? What's the strategy,
• 12:22
  the outlook from their perspective?
• 12:23
  Their focus seems to be on, one, strengthening their market position where they're already strong.
• 12:29
  Two, continuously looking for operational efficiencies, managing costs,
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  basically. Standard playbook stuff, but important.
• 12:35
  Very. And three, strategically expanding their product offerings,
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  trying to adapt to consumer needs and maybe find new growth areas to offset
• 12:43
  those pressures. So defend the core, manage costs, and innovate or expand where possible.
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  That seems to be the plan. Trying to sustain the momentum while mitigating those risks. Okay.
• 12:54
  Before we wrap this up, any other noteworthy details from the report we should mention?
• 12:59
  Little things that caught your eye? Yeah, a couple quick things. First, dividends.
• 13:03
  Just to reiterate, no interim dividend was declared or recommended.
• 13:07
  Right. They usually decide at year end. Typically, yes. Yeah.
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  So that's something to watch for later in the year.
• 13:12
  Second, that SG Protein investment, there's an update. Oh, yeah.
• 13:16
  They're moving forward with subscribing to more shares, about $900,000 worth.
• 13:20
  It's partly cash, partly converting loans they'd already made.
• 13:24
  Okay. And what does that mean for their ownership?
• 13:26
  Well, the process isn't quite finished. The shares aren't allocated yet.
• 13:29
  But they expect that once this first closing is done, Kongguan's stake in SG
• 13:35
  Protein will actually decrease slightly to around 22.5%. Interesting.
• 13:40
  Anything else? Just a quick mention of related party transactions.
• 13:44
  It's normal when you have associates, but they do note significant purchases
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  from and sales to companies like United Malay and Flower and another called
• 13:53
  Chung Ying Confectionary.
• 13:55
  It just shows how interconnected their opera orphans are. Right.
• 13:58
  Part of their business ecosystem.
• 14:00
  Okay, let's try and summarize then key takeaways from this deep dive into Kongguan's
• 14:05
  first half of 2025. I think the main story is that significant,
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  positive financial turnaround.
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  Moving from a loss to a profit is the big headline. Driven mainly by?
• 14:16
  Primarily driven by really strong performance revenue growth,
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  better profits in their Malaysian operations.
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  And that was nicely coupled with much better results from their associated companies,
• 14:25
  particularly SG Protein turning a corner. But with caveats for the future? Definitely.
• 14:29
  They're operating in what sounds like a pretty challenging environment.
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  Inflation, currency risks, competition.
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  These are real headwinds they acknowledge and need to navigate.
• 14:39
  So positive results are great, but sustaining it will require ongoing strategic effort.
• 14:43
  So this whole analysis, this deep dive, it really shows you how all these different
• 14:49
  pieces fit together, doesn't it?
• 14:51
  Sales, investments, currency, market conditions, they all interplay to shape
• 14:57
  a company's financial health. Absolutely.
• 15:00
  Understanding those dynamics gives you, the listener, much better context for
• 15:04
  looking at any business, not just Kong Gwan. Right.
• 15:07
  And I guess that leads to a final thought. Boy, considering those challenges,
• 15:11
  they flagged inflation, competition, currency, and the strategies they mentioned,
• 15:14
  like efficiency and product expansion.
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  It makes you think, doesn't it? About what specifically? If you were looking
• 15:20
  at their next set of financial results, say the full year report,
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  what specific numbers or metrics would you be laser focused on?
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  What would tell you if those strategies are actually working to keep this positive
• 15:29
  momentum going and successfully handle that tough competitive landscape they
• 15:33
  describe. Something to mull over.