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Willas-Array Electronics Flips From Loss To Profit In 2025 Interim Report · Investor Exchange

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  Music.
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  Hosts Matt and Sally. Welcome back to The Deep Dive.
• 0:09
  Today, we're digging into the interim financial report for Willis Array Electronics.
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  That's for the first half of their fiscal year 2025.
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  Right. 1HFY 2025.
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  And this one, well, it's really defined by a pretty dramatic turnaround, isn't it?
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  It really is. They went from a big loss last year to, well, a profit this time around. Exactly.
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  So our mission today is to figure out how they pulled that off,
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  what drove that big swing, especially, you know, with revenue actually down slightly.
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  Yeah, that's the interesting part. Revenue dipped just about 2.1%.
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  You might glance at that and think, oh, okay, a bit soft. But then you see the profit line.
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  It's a massive positive swing, nearly HK $100 million difference.
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  So, okay, let's unpack this. Where do we start? Let's start with those core
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  numbers, the big shifts.
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  So 1HFY 2024, the previous period, they had a net loss attributable to the owners
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  of around HK $78.6 million.
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  Right, a substantial loss. A very substantial loss. Now, fast forward to this
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  period, 1HFY 2025, and that flips entirely.
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  They posted a profit of about HK $20.7 million.
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  Wow. Okay, so that's the swing right there. And for shareholders,
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  that translates directly, right?
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  The earnings per share. Huge difference. It went from a loss of,
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  almost 90 HK cents per share, 89.64 cents technically, to earnings of 23.63 HK cents per share.
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  I mean, that's a fundamental shift in value and stability. Absolutely.
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  So where did that stability come from? What was the engine driving this?
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  Well, you've got to look straight at the gross profit.
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  That's really where the main action happened. Gross profit jumped from about
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  HK $35 million last year.
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  Which sounds quite low on our kind of revenue base.
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  It was low. But this year, it jumped to HK $113.7 million.
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  Over three times higher. Exactly. And that immediately tells you something shifted strategically.
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  They weren't just chasing volume
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  anymore. They were focused on pricing and managing their cost of goods.
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  Right. So if revenue is slightly down but profits way up, it has to be about
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  internal changes, efficiencies, maybe strategic choices.
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  Precisely. It wasn't about a booming market lifting all boats.
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  This was engineered internally.
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  So what were the key factors? You mentioned three areas.
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  Yeah, it really boils down to sort of three main things.
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  First, just a general underlying improvement in their gross profit margin.
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  Okay, the core business performing better. Right.
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  Second, they actually had a net reversal of impairment losses on some trade
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  receivables. Last year, they had losses.
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  This year, they got some back, essentially.
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  Better credit management. Interesting. And the third? And third,
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  this one's quite significant, a net reversal of inventory allowance.
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  Again, compare that to last year where they had to provide for inventory losses.
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  Okay, let's zoom in on that margin story first.
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  The overall gross profit margin, the GPM, that figure really tells a tale. It absolutely does.
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  It went from, frankly, a pretty tough 3.0% in 1HFY 2024.
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  Yeah, very tight. Up to 9.8% in 1HFY 2025.
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  That's a huge leap in operational terms. But you mentioned we need to kind of
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  decode that 9.8% because of the inventory effect.
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  Exactly. You can't just take that 9.8% at face value without understanding the inventory piece.
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  A big chunk of that improvement came from successfully selling off older inventory
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  that they'd previously written down or allowed for. Ah, okay.
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  They recorded a net reversal of that allowance for inventories.
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  Amounting to about HK $18.9 million this half.
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  So basically, they sold stock they had already accounted for as having little
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  or no value, and they actually got money for it. It's like finding cash in the warehouse.
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  That's a good way to put it. And remember, last year, in the same period,
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  they had the opposite problem. They had to take a big TraVision and allowance
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  for loss on inventory of about HK $41.8 million.
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  Wow. So the year-on-year swing just from that inventory line item,
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  that's HK $18.9 million positive this year versus HK $41.8 million negative last year.
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  That's over HK $60 million difference right there. Correct.
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  That's a massive non-operational swing factor within the GPM number.
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  Okay. That context is crucial. So the headline 9.8% GPM is great,
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  but what about the underlying sort of repeatable performance if you strip out
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  those inventory one-off?
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  That's the critical question for understanding the future, isn't it?
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  And the report gives us that insight. Even when you adjust for those inventory
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  provisions and reversals, the underlying adjusted GPM still improved significantly.
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  It went from 6.5% in 1HFY 2024 up to 8.2% in 1HFY 2025. Okay,
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  so a 1.7 percentage point improvement.
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  That feels more like a sustainable structural gain in efficiency.
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  Exactly. That 8.2% adjusted figure shows genuine health in the core operations,
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  separate from the inventory cleanup.
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  And it wasn't just margin rate. They were tightening the belt elsewhere, too.
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  Costs were down. Definitely. You see it in administrative expenses.
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  They cut those by each case, $7.4 million, which is about 9.5%.
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  They specifically mentioned proactive cost streamlining. And that's key.
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  When revenue isn't growing, every dollar saved there drops straight to the bottom line.
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  And their risk management improved, too, beyond inventory. Remember that second point.
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  The trade receivables. Right, the impairment reversals. Yeah,
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  under the expected credit loss, or ECL, model, they recorded a net reversal
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  of HK 7.0 million dollars.
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  Think about that they assessed their potential bad debts and decided things
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  were better than previously expected by HK 7 million dollars.
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  Compared to last year when they had to book a loss. Correct.
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  Last year they booked a HK 1.9 million dollar loss provision.
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  So that's another positive swing, suggesting they're doing a better job picking
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  clients or collecting cash, or maybe both.
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  Okay, better client selection seems like a theme emerging here. It does.
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  And even smaller things held, like they had lower exchange losses,
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  about HK $2.7 million less, mostly because the Chinese renminbi was relatively
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  stable against the U.S. dollar during the period.
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  So just good financial hygiene across the board, really supporting that move
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  back to profit. Exactly.
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  Which brings us back to that slight revenue dip, the 2.1%. Now we can see it
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  wasn't just, you know, a weak market across the board. This was more deliberate.
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  Highly deliberate, it seems. They appear to have actively replaced some lower
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  margin, perhaps higher risk business with more profitable focus areas.
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  It was strategic pruning.
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  Okay, let's get into that. Which segments did they focus on for growth?
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  Where did they sort of double down?
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  Well, the growth areas are pretty clear from the report.
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  Automotive was a big one. Revenue there was up 8.2%, hitting HK $332 million.
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  And why was that growing?
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  They mentioned expanding share with key clients and specifically strengthening
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  ties with domestic Chinese auto manufacturers.
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  That feels very strategic, targeting that huge domestic EV and auto market.
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  Makes sense. Any other growth spots?
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  Yeah, the other segment, though smaller, grew nearly 13%. They put that down
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  to diversifying brands and interestingly, a strategic move into the drone sector. Drones.
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  Okay, so focusing on tech and auto. Seems like it.
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  Now, conversely, where did they pull back? The industrial segment,
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  for example, was down 2.7%. But you'd think industrial might be okay, generally.
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  Well, yeah, the report even hints the overall segment had some momentum,
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  but their decrease was, and they're quite clear, due to strategic optimization.
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  Meaning? Meaning they suspended cooperation with a major client because the
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  profit margin was too low and they perceived potential credit risks.
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  Ah, so they walked away from revenue intentionally because it wasn't good quality revenue.
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  That's exactly how it reads. A tough call, but it lines up perfectly with that
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  improved GPM and the receivables reversal we just talked about.
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  Quality over quantity. Seems to be the mantra.
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  And you see it again in audio and video. That segment was down over 17%.
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  Why was that? Two reasons given.
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  One was external self-face, a forced termination with a client due to U.S. sanctions.
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  Can't do much about that. Right. But the other reason, a proactive exit from
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  low margin business with another client.
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  Same pattern again. Deliberately shrinking parts of the business. Yes.
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  And telecommunications was similar, down almost 12%. Again, a mix of factors.
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  Some product reached end-of-life EOL from a supplier.
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  So the supplier stopped making it. Right. And also, restricted cooperation with
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  another major client hit by U.S.
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  Sanctions. External factors playing a big role there. And the biggest drop.
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  Lighting. Down over 20%. That was mainly due to a core client-changing strategy
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  and deciding to buy directly from the supplier, cutting them out.
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  Plus, high inventory levels at that client didn't help demand.
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  OK, so summing up the first half, they seem to have consciously shed lower quality,
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  higher risk or externally challenged revenue streams.
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  And the positive impact from cost savings, inventory reversals and better core
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  margins more than offset that small top line dip.
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  Right. Leading to that big profit swing. That's the narrative. Absolutely.
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  And that discipline didn't just fix the profit and loss statement.
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  It flowed straight through to the balance sheet. It's looking much healthier now.
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  Giving them a stronger foundation for whatever comes next.
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  Where do we see that health liquidity? Yep.
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  Starting with liquidity, the current ratio, which measures their ability to
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  cover short-term liabilities with short-term assets, improved.
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  It went from 1.20 up to 1.26.
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  So a bit more breathing room day to day. A bit more buffer, exactly.
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  They're less stretched.
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  And supporting that, we saw the inventory management success reflected here, too.
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  Inventory has actually decreased quite a bit. From? From about HK $418 million down to HK $339 million.
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  And the inventory turnover days improved too, from 2.2 months down to 2.0 months.
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  They're holding less stock and selling it faster, generating cash more quickly.
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  Less cash tied up in boxes on shelves. Precisely.
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  But maybe the most striking balance sheet change is the debt level,
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  the gearing ratio. Yes, that looked dramatic. What was the change?
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  It dropped significantly. Net gearing went from almost 140%,
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  139.9% to be exact, down to 104.9%. Wow.
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  Cutting 35 points off your gearing ratio is, well, that's huge.
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  It's a massive deleveraging.
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  Gearing basically compares your debt to your equity.
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  Think of it like your personal debt-to-income ratio, but for a company.
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  So how did they manage that?
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  Mainly by reducing loans from their ultimate holding company that dropped by over HK $80 million.
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  That's often sort of internal, potentially expensive financing.
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  And also by having more cash on hand. They shifted the balance away from debt
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  towards equity and cash.
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  So cleaning up operations and cleaning up the capital structure? Yes.
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  And that gives them more financial firepower. You see it in their unused banking
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  facilities, too. How so?
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  Those grew substantially. They went from having about HK $315 million in available
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  credit lines up to nearly HK $428 million.
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  Yeah. So they paid down some debt and secured access to more potential funding if needed.
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  Okay. They really shored up the foundations, which leads us nicely into the
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  outlook, the strategy section. This is where it gets really interesting,
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  right? They've done the cleanup. Now what?
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  Exactly. They've built this financial platform. Now, how are they going to use
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  it? especially with those headwinds you mentioned, U.S.-China tensions.
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  Softer domestic demand in China.
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  Despite that, their strategy sounds pretty ambitious.
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  They've laid out five priorities. The first couple seem really focused on specific markets.
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  Very focused. Priority one is to deepen their EV market focus.
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  They're not just dipping a toe in, they're going deep.
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  Expanding product lines, advanced battery systems, powertrain tech.
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  Teding edge stuff. Yeah.
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  Broadening distribution, bringing in competitive overseas product lines,
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  but also prioritizing resilient domestic suppliers in China.
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  It's a clear, major bet on the electric vehicle ecosystem.
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  And that takes capital, which they now seem to have freed up.
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  Precisely. And priority two supports that. Build segment leadership.
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  They explicitly state they want to be market leaders in high-quality,
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  automotive, and also audio components, not just a player, a leader.
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  Okay, so deep focus on auto EV and audio. What about the other priorities?
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  They seem more structural.
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  They are. They reflect the lessons learned, I think.
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  Priority three is develop a collaborative platform. What does that mean?
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  It sounds like a digital hub or service to help Chinese manufacturers expand
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  overseas or to help Chinese clients relocating production, maybe connecting
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  them with local suppliers, offering market insights.
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  It's a value add beyond just selling components.
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  Like a service layer on top of distribution. Kind of.
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  Then priority four is implement a flexible partner program.
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  This sounds like offering customized solutions, adaptive service agreements
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  for key clients, moving away from one size fits all.
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  Again, learning from maybe losing clients or having low margin deals,
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  tailoring solutions for the right partners. Exactly.
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  Which leads directly to priority five.
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  Optimize client selection. Ah, there it is again.
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  Being picky about who you work with? Using advanced analytics,
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  they say, to prioritize partners in high-growth sectors.
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  They specifically mention renewable energy and technology here,
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  alongside auto and partners with strong financial stability.
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  So using data to avoid the kind of low-margin, high-risk deals they seem to
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  have exited, it all connects back.
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  It really does. The positive impairment reversal this has. That's the result of better selection.
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  Building analytics into future selection, that's making the discipline systematic.
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  It's a virtuous cycle they're trying to build.
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  And just to underline that they have the means to pursue this strategy,
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  there was that event right after the reporting period ended,
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  wasn't there, in July. Yes, very important timing.
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  On July 15th, 2025, they completed issuing 15 million new ordinary shares. Raising fresh capital.
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  Significant fresh capital. They issued them at HK$2.66 per share,
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  representing about 14.6% of the enlarged share capital.
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  So a major equity injection timed perfectly to fuel this strategic push we've just outlined.
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  Okay, so let's try and summarize the key takeaway from this deep dive into 1HFY 2025.
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  Well, I think that financial success, that big profit swing, it wasn't luck.
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  It was driven by really rigorous internal control costs, inventory credit risk,
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  and some brave strategic choices to poon the business. Shedding less profitable parts.
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  Exactly. And doing that has strengthened the balance sheet, slashed the gearing
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  ratio, and crucially provided the financial base, both from operations and now
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  this new equity, to make a serious push into these high potential areas like
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  EVs, automotive, and technology.
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  They're aiming for controlled, high-quality growth now. Which brings us to a
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  final thought for you, our listener. The board decided not to pay an interim dividend.
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  They explicitly said they want to retain cash for its business operations and
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  future growth. Mm-hmm. Keeping the powder dry. Right.
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  So given that decision to retain profits internally and the completion of that
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  HK $2.66 per share equity raise just days later in July,
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  how do you think that combination internal cash plus external equity might accelerate their plans?
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  How quickly could they become a real leader in these fast-moving EV and tech
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  component markets they're targeting? They certainly seem to assemble the resources.
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  Now it's about execution. A fascinating position to be in, built from some tough
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  but profitable decisions. Definitely something to mull over.
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  That's all the time we have for this Deep Dive. Thanks for joining us.
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  Music.