Tiangong International high margin doubtful debt rate rising at risk

Our correspondent author Liang/Wentian International (00826.HK) is headquartered in Danyang, Jiangsu Province, the main business of high-speed steel, high-speed steel cutting tools and mold steel production and sales. The company claims to be the world's third largest and China's largest high-speed steel production enterprises, mold steel capacity is ranked fifth in the country. Company in July 2007 on the listing of the Hong Kong Stock Exchange, the largest shareholder is chairman Zhu Xiaoqun and his wife Yu Yumei, as of April 16, 2014, the Zhu couple holding 740 million shares, accounting for the total number of shares of the company 38%. 2013 earnings show that the company's annual sales revenue of more than 3.4 billion yuan, net profit of 470 million yuan. Since the listing, the company has shown a high rate of growth and beautiful profit level, 2007-2013 years of annual compound growth of income to maintain around 12%, operating profit rate (EBIT profit margin) is from 2007 12% to 2013 22%. In recent years, China's iron and steel industry overcapacity, demand is not flourishing, most of the enterprise profit or even loss, in such an environment, Tiangong international good growth is particularly prominent, but also somewhat incredible. At the same time, the company's asset situation and cash capacity have not improved, and the debt rate is rising to a dangerously high level. Gross profit margin of the company's two major business is high-speed steel and mold steel production and sales, 2013 combined revenue accounted for the company's operating income of nearly 59%, accounting for 89% of gross profit. The company said that in the field of high-speed steel production and sales in the domestic first, and in the field of mold steel competitors include Fushun special Steel (600399.SH), Baosteel shares (600019.SH), the Great Wall special steel, and the company is also in the fifth place leading position. So we visited a a-share of several production mold steel listed companies, including Fushun special Steel, Baosteel, Daye Special Steel (600708.SH), Xining Special Steel (600117.SH) and so on. such as Fushun Special steel interviewed employees said, "As I know, mold steel larger enterprises have Daye special steel, Hing Cheng Special steel." And the sales staff of Daye special steel Jiangsu Area said, although its customers are in Jiangsu, but have not heard of the Tiangong International in Danyang, Jiangsu, "our competitors are such large enterprises as Fushun special steel and Baosteel." "We also interviewed Cisa, who said that the special steel industry and the general steel similar, in recent years the overall relatively depressed." High-speed steel and die steel unless the high-end products, such as for military, aerospace, general product profits are very low. Domestic enterprises are relatively low-end products, the threshold is low, many small factories can do, but in general, several large state-owned enterprises market share relatively large. We also from Alibaba [Weibo] found more than 10 franchise mold steel dealers, these dealers said that the domestic high-speed steel market is very dispersed, state-owned enterprises such as Baosteel, Daye Special steel, Fushun special steel, such as the quality of relatively more reliable, processing costs than private enterprises relatively expensive (20-30 yuan per ton). Another company in Hebei, also operating high-speed tool steel Enterprise River Metallurgical technology Sales manager said, "2013 Our high-speed steel production of more than 20,000 tons, should be the largest in the country." "Perhaps these respondents with natural tendencies, but also difficult to avoid peer to the suspicion of light, but if Tiangong international industry status as the company claimed to be so Zhuo ran, why in the industry few people mention?" In addition, the company said that its high-speed steel and Die steel in 2013 recorded a high gross margin of 37% and 36% respectively, in the past five years since 2009 has also maintained more than 20% of the margin level. However, we visited Fushun special steel, Baosteel, Daye Special steel, Xining special steel, river metallurgical technology, such as several enterprises, these enterprises are believed to die steel products in recent years, 8%-10% of the gross margin level, because it is a large product, the price will not be too big difference, the level of Maori will not be too big difference. In addition, due to the recent two or three years of decline in the downstream machinery processing industry, the impact of shrinking demand, corporate profitability is difficult to improve. Such an environment, Tiangong International high gross margin has been maintained and continued to improve, is different from the same company's own technology? Amazing inventory since the international listing of Tiangong, the company's free cash flow is negative every year except 2011. During the period, the company's liabilities also from the end of 2007 from less than 700 million yuan to 2.7 billion yuan at the end of 2013, net debt rate of up to 86%. In addition to the IPO when the company financed 730 million yuan, the company also held a rights issue in 2011, refinancing 180 million yuan. According to the company's earnings, the total net profit generated by the company in 2008-2013 was also close to 1.9 billion yuan. So, where's the money? Moreover, the company's accounts receivable and inventory growth rate is much higher than the increase in sales revenue. 2013 the company's production cost of 2.6 billion yuan, at the end of the year inventory unexpectedly up to nearly 2 billion yuan. The company said inventories were higher because some of the raw material prices were more attractive at the end of 2013, so they stocked up on some goods. Compared with the index of a A-share industry company, Daye Special steel and Xining special steel inventory accounted for the proportion of production costs in the year between 10%-25%, Fushun special steel slightly higher, but also not more than 50%. and Tiangong International this proportion unexpectedly as high as 77%. What kind of company needs to reserve the means of production in advance for half a year? Does such a large stockpile have taken into account the risk of falling raw materials and the cost of capital? In turn, we can even suspect that nearly 2 billion yuan of inventory is real? Since 2007, the company has spent a large amount of capital expenditure each year, accordingly, the company's fixed assets (pp&e) from the end of 2006 430 million yuan to 2.5 billion yuan at the end of 2013, doubled 5 times times, while sales revenue increased by less than twice times (160%). In order to avoid the depreciation costs of excessive fixed assets, the company silently extended the depreciation period of the equipment from 10 years to 20 in 2008. It is doubtful that the capital expenditure or existence of the company is grossly exaggerated to make a profit. Its fixed assets also exist to increase false suspicion.At the beginning of the company's IPO in 2007, the Chairman Zhu Xiaoqun shareholding ratio was 52.5%. And in the following years, Zhu Xiaoqun constantly reduce. As of April 16, 2014, its shareholding has fallen to 38% per cent. As the actual control person, Zhu Xiaoqun's reduction behavior is out of the company's outlook is not optimistic, or other considerations?