RPL - and the Louisiana land grab analogy

[winner69]

A little story from the RPL annual report - I love companies that employ a bit of rhetoric and analogy to its dealings.

Richina only wanted the land and buildings that the tanneries were in but the owners of Shanghai Leather Co said the land and buildings weren't for sale but the whole company was and so Richina ended up with ownership control of 44 enterprises, interest in other enterprises and land rights over 40 parcels of real estate in Shanghai.

Then this history lesson -


By a treaty signed in 1803, the US purchased from France the Loiusuana Territory, more than 2 million kilometeres of land extending from the Mississippi River to the Rocky Mountains. Having changed geopolitical priorities at the time, Napolean Bonaparte offered to sell Louuisana instead of further expansion in the Americas. Conincidently, President Thomas Jefferson had already sent James Monroe and Robert Livingston to paris to negotiate the purchase of a tract of land on the lower Mississippi River or to at least establish a guarantee of free navigation on the river. Surprised and delighted by the French offer of the whole territory, they immediately negotiated the treaty and made the purchase, for US$15 million.

The Louisiana Purchase greatly benefited and changed America forever. In one stroke, the United States would double in size, and own an enormous tract of land that opened to settlement, and was assured free navigation on the Mississippi River.




And as Richina moves forward we should remember this history lesson, how can they go wrong.

[Halebop]

Brent Sheather has some interesting comments in his column in the Herald this week stemming from the ANB Amro/London Business School "Global Investment Returns Yearbook 2005". The crux of their research showed sharemarket returns were better in low growth economies than high growth (I suspect if they did qualitative research it would be because of the poor cashflow that growth and greenfield companies often endure but thats just conjecture).

Personally I'm happier to play on China by supporting Australian and New Zealand companies that might help fuel Chinese growth and infrastructure rather than physically participate in the Middle Kingdom.

[Lizard]

Like RPL, but not sure what to make of that current ratio...?

[Bling_Bling]

I dont have RPL annual report. What is their debt and liabilities?

[Ed]

Hi Lizard, are you referring to the current P/E as it appears on Yahoo and some other services?

If so, the correct P/E is 10 (at a SP of ($NZ0.80).

The reason the P/E appears as 14.13 on Yahoo, is that they use the $USD earnings figure against the $NZD share price(RPL reports in USD)of $USD0.0566. This is clearly not correct.

At the current NZ/US rate, the earnings are roughly$NZ0.08 cps = P/E of 10.

[Lizard]

No. I meant the current ratio as in current assets:current liabilities.
From my basic understanding of accounting, it looks insolvent.

[Lizard]

quote:Originally posted by Bling_Bling

I dont have RPL annual report. What is their debt and liabilities?


Current assets: $113,435
Current liabilities: $133,579
(including debt $24,799)
Non-current assets: $103,560
Non-current liabilities: $18.050

Not sure if that is alot of help without the AR for more detail.

Cheers, Lizard

[Ed]

This jumped out of the AR at me too: I did the ratios and they definitely did not look too flash!

It may come down to my (our?) understanding of "current". When I was sleeping through accounting 101, "current" liabilities meant things that had to be (or might have to be) paid in the next 30 days / "current" assets meant things that were cash, or could be turned into cash in the next 30 days.

When I look at the notes (note 11) it says that the maximum term of the 24m of "bank" borrowings was 270 days. It does not say what amonnt was due in 30 days. I guess as long as the company can roll this facility over, then, no worries.....However, it beats me why the borrowings repayable in more than 30 days would fall in the current liabilities.

The 84m of Trade and other payables is even less clear to me: I understand the 39 m of trade payables identified in note 12, but cannot fathom what the "Other Payables and accruals" of 29m might be, or when they might be due.

However, I take some reassurance from the fact that there is 66.6 of cash and and trade receivables against 39m of trade payables.

This is fine as long as (a) the bank debt continues to be rolled over, and the "Other Payables and accruals" are not payable in less than 30 days.

I have a feeling that this problem may come down to my understanding of "current"

[Halebop]

It depends on the business too.

I remember reading an analysis of Dell a few years back. It highlighted that each sale they made gave them 8 days of free cash(flow) to the same value. I.E. When you bought something on average all their outlays were incurred 8 days after your purchase money was received. This runs contrary to how most businesses operate (especially Dell's competitors) and partly signalled how their long term growth was funded and a key cost/competitive advantage.

Not sure this applies to a Chinese leather goods maker though...

[Lizard]

quote:Originally posted by Halebop
Not sure this applies to a Chinese leather goods maker though...


Applies to Mainzeal - pay when paid clauses to subcontractors, and 10% plus retentions, so can have negative working capital if well handled. But this difference between current assets and current liabilities came with the SLC balance sheet - thought I'd wait to see how it looked on consolidation before I got too nervous.

Ed - I didn't have the privilege of sleeping through accounting 101 or even 5th form accounting (too busy at art class if I recall correctly), so I hate to contradict you, but pretty sure current means "realisable within 12 months". Can be a little open to opinion as to whether items are current or non-current, but usually companies would err in favour of having a healthy current ratio...

I seem to remember that the SLC documentation suggested they might not have to pay some of the payables. So that might turn out to be the answer - maybe they wouldn't want to write them off the balance sheet too soon - can't make the Chinese government look like they sold off SLC too cheaply, perhaps. Raising more bank borrowings in China is probably not as easy as it looks (though guess they can probably roll-over the existing bank borrowings) and on-selling some of the SLC assets might not be that easy either with all the clauses they come with. But I was hoping someone alot more experienced than me would comment and reassure me.

[Ed]

Lizard, You should have no qualms about contracdicting me on this - Current does mean "realisable/payable within 12 months..." You are, according FT online, absolutely correct

In terms of the overall picture, it does mean that the ability to keep that debt rolling is pretty vital. Although, I have also read in previous reports how they use Mainzeal to provide liquidity in exactly the way you describe.

[Lizard]

Made myself read through the fine print last night. Nothing in the numbers to provide particular reassurance. The CEO comments on page 7-8 are useful though:

"To start with, we intend to actively negotiate and settle all the legacy bank and commercial obligations we inherited with these businesses and to free the land and buildings from old mortgages. RPL will then be able to restructure, consolidate and improve our overall banking arrangements and relationships. We aim not only to continue reducing our funding costs...but also dramatically improve the Company's liquidity. For now we want to take advantage of the many attractive opportunities in front of us, without resorting to capital raisings."

Well, they seem confident they won't have to dilute my stake...I was starting to think another capital raising would be announced at May meeting.

So, this years balance sheet looks very different to last years, but by next year we may well see another transformation. Can't invest in this share on the available numbers. But the opportunity and vision seem convincing. The could probably be compared to a small resource company sitting on a potential gold mine. Unfortunately, for all the rhetoric, there is nothing that gives me an inkling of how big that mine could be and whether they are capable of effectively mining it. Suspect it is going to be a bumpy ride for two-three years, but there is really no ceiling on the up side... maybe (gut feel) a $1b company in 5-10 years? Here's hoping!! (PDYOR)

Cheers, Lizard

[Bling_Bling]

It seems the only way to reduce debt is through captial raising from existing or new shareholders. The weakness in the share price may reflect this.

[Nimble]

Has anyone put any estimates together for 05? My attempt below. Comments welcome. Figures seem incredible!!

FY04 US$8.2M.
Pre acquisition they were forecasting US$5M, At Dec SGM said they would have missed this figure if it wasn't for acqusition so have assumed they achieved say US$4.5.
FY 04 US$8.2 - US4.5 (existing business) = US3.7 from new business (67% shareholding) in 2 months. Settlement was 28/10/04. Annualised 3.7 * 6 = US$22.2M. Went to 90% ownership late Dec so US$22.2 * 90/67 = US$30.2
Add the 2 together US$30.2 + US$4.5 = US$34.7 for 05. This is without profit growth factored in. @72 US/NZ = NZ$48.2M
With 151m share on issue EPS 32cps Price 78 PE 2.4

[Lizard]

Was trying to figure this out myself. But I think most of the SLC profits are all one-offs. For instance, I think (but not sure) that the discount on acquisition is represented in there (the bulk of the profit for financial?). Also, SRL looks from my reading to have got $2.28m on the income statment for the change in lease arrangements effected by the purchase of the buildings (pg26). Any accountants out there who can comment?

Mainzeal seems to have contributed well to second half (their profits can be very bumpy, so can't extrapolate that too easily - though outstanding order book going into the year ahead). Looks to me like SRL didn't make much at all in the second half - possibly due to installation of the cangilones (a process not yet completed with 3 more to come) and losses in ovine and bovine garment leather. Blue Zoo looks to have been in profit for a change.

My guess for next year is that Mainzeal should continue to do as well or better. SRL will perform worse and Blue Zoo make a negligible profit contribution - so maybe US$4m from existing? SLC is likely to be a collection of one-off costs and profits for the next year or two rather than generate sustainable income. Looks completely unpredictable to my mind.

[Lizard]

Should probably add that those two one-off items mean the profit for existing businesses would only be $US3.4m (or $US1m in second-half). RPL doesn't seem particularly good at profit forecasts...

[Bling_Bling]

Why is RPL still holding onto the Blue Zoo? Should have sold this DOG long time ago. There are a number of underwater world opened up in Beijing. How will the downturn of the global economy going to affect leather demand and construction? First things to get hit.

[TerryA]

Bling,

>>going to affect leather demand<<

I and four of my friends recently purchased new cars quite independantly of each other. All of us chose the leather upholstery option even though it added around 8% to the cost.

I think that you will find that "leather" now accounts for around 25% of the upholstery in cars where it is an option and the trend is rising. A slow down in the world economy will certainly reduce this trend but I doubt if it will be reversed.

Agree with you on Blue Zoo but surely "Dogfish" is more appropriate !

[Lizard]

quote:Originally posted by TerryA


I and four of my friends recently purchased new cars quite independantly of each other. All of us chose the leather upholstery option even though it added around 8% to the cost.




I did too...

In most cases the leather option should not be extra as it is usually actually cheaper than the material being used.

[Lizard]

quote:Originally posted by ENIGMA

In most cases the leather option should not be extra as it is usually actually cheaper than the material being used.


Hah! A bean-counter perhaps? Trying to spoil our pleasure?

The smell of new leather... mmmmm....

So sorry your investments didn't return enough last year ENIGMA ;)

Lizard. No just amazed at how people are sucked in. It is like buying shares by throwing darts at a dart board. With share on asx all having a numerical signature it is an easy way for some people to pick shares. I like to do a little research.

[Lizard]

quote:Originally posted by ENIGMA

Lizard. No just amazed at how people are sucked in. It is like buying shares by throwing darts at a dart board. With share on asx all having a numerical signature it is an easy way for some people to pick shares. I like to do a little research.


Are you suggesting we are being sucked in by paying extra for leather? Hmm. Well, I admit that when it comes to spending money, I'm not the worlds best researcher. Prefer to put the effort into making the stuff, though I'm a great admirer of those who research their personal expenditure.

But maybe you are saying we are being sucked in to buying RPL? Would love it if you have some research to share on RPL - I could use some meaningful input on this one!

[Ed]

Getting back on topic, I find it is way too hard trying to pick the FY - I have never got it right in the past. However, while I am not as optimistic as Nimble, I would be looking at a minimum of $US5m for the half.

$2m for mainzeal is a "gimme". They earned 3.9 for the full year, and their order book is larger this year by a significant amount. There were also some delayed projects that should come in this half. (As advised by a builder mate FWIIW)

$3m for leather also looks pretty safe. While there were a lot of positive one offs in the 04FY, there were also a number of negative (hopefully) one offs. In particular, writeoffs in the Ovine and upholstery divisions were a drag. The language in the AR suggestes these will be addressd. (Mind you, they did say that last year!). Net/Net, previous years results suggest that in the absence of these one off items, the leather division is well capable of $6m per year.

Anything from BZW would be a bonus, as would any contribution from the acquired assets. My pick with the SLC assets is that one-offs either way will pretty much net themselves out - with more liklihood of upside than downside.

Leather in cars? Well, US manufacturers will do anything to move their steel, and leather as an option is pretty cheap, but highly valued by customers.

[Bling_Bling]

I am actually quite surprise that RPL have not made full use of China. RPL have been in China for at least 6 years now and the economy is booming. The only real contribution is coming from Mainzeal, leather is starting to move, but has taken long enough while Blue Zoo is a dog and will always be a "dogfish".

Under a smart operator, RPL would havesold down their NZ arm and assets with no real value and capitalise in China's booming industries and business. I have reservations about RPL's management. RPL large debt is not helping them. For RPL to move onto the next level they need to restructure their debt level and management team. Too many layers at the management level, needs a flat structure. Also needs a leader with vision and business ideas.


disc: Not a shareholder, just an observer and doing some research with view to invest, maybe.

[Ed]

Bling,

6 years in China is the blink of an eye - for the record RPL has been there 10 years, or close to.

Building a business in that time and not completely losing your shirt is an achievement. Be patient. If you have less than a 10 year time frame China is not for you. BTW, Plenty of supposedly well managed companies have been and gone from China in the last 10 years, - Think of Flrtcher Steel, Lion Nathan, Fosters, Milburn Cement, and mamy others...

"Under a smart operator, RPL would havesold down their NZ arm and assets with no real value and capitalise in China's booming industries and business. "

That is exactly what RPL has done: They sold Mobil on the Park, Mair Venison, Mair Astley etc...and moved assets to China.

[winner69]

Mainzeal will exist as long as RPL have NZ tax losses to offset .... only useful if you have NZ generated earnings, not Chinese stuff

Sell Mainzeal and these are lost ... shareholders want that?

[Bling_Bling]

I am looking deeper into the puppy. RPL is starting to interest me. I understand the Shanghai Leather is one of the largest in China. Get rid of Bluezoo and Mainzeal will have to go one of these days and you will have a pure leather play. Concentrate on a couple of good performing assets and you will hav a winner. Abit like Corporate Investments with Montana for those that remembers. :)

[Lizard]

Thanks for the useful comments Ed. I tend to agree with you. I think RPL has fantastic potential now. But feeling there could be some bumps over the next two years. Fortunately, Mainzeal is going strong for a while longer and when things slow there, the leather business should be past the worst of its hiccups. The worry with RPL is that if you look at the earnings on the individual businesses, they are not very consistent. So while they have their eye off the ball and are digesting the SLC assets, there is every possibility they could turn in a disappointing profit (actually, even a reasonable $US5m profit might now be seen by some to be disappointing). I bought RPL shortly before the last rights issue, so what with rights and capital growth, its now a reasonable chunk of my portfolio... excuse me for being nervous!

The one thing keeping me there are the managements positive comments - that they seem to think they can avoid a rights issue is reassuring - makes me think they are confident they have something up their sleeve which will kick-start the profits out of SLC... but then I don't totally trust this management team to mean what they say either....