Kingmaker Footwear

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Kingmaker Footwear is HK-listed a contract manufacturer of shoes whose main customers are Asics, Clarks, Quiksilver, and Sketchers. 

Its factories are located in Vietnam, Cambodia, and China, with Vietnam's plant contributing about 68% of sales, and Cambodia's plant contributing about 16% of sales. From its latest interm results, its plant in China continues to decrease its production.

Its main customers used to be from US and EU, which made up 90% of sales. But Asia is now its main customer with 40% of sales, followed by EU with 31% of sales, and US with 12%.

Kingmaker -- which is one of Webb's chips -- has been suffering since the past year from poor sales and margins, resulting in profits and dividends being severely impacted. Its production volume has also shrunk from 25m pairs of shoes in 2013, to about 10m pairs of shoes in 2019. Its profits, dividends, and share price are now at 10-year lows.

The company had a very good run over the past 10 years as a Webb chip; distributing about 90% of its profits as dividends to shareholders. It looks like the BOD is friendly to opmi, but will the business and its once-high dividends ever recover?

Shoe manufacturing is likely to be an ever-green business, but it is also a business with low-barriers, and hence, numerous competitions. To thrive, Kingmaker has to deliver the best quality products, at the lowest cost. While the company has long shifted production to lower-cost locations, the decrease in production volume over the years has eroded any possible gains from larger production scale.

Its latest 6m results ending September 2019 registered a HK35m loss. Nevertheless, a 2 cent special dividend was paid out, and management has a "cautiously optimistic outlook for the current financial year."

For now, the market is valuing the company at about HK$670m, which is below the combined value of its net cash (HK$528m) and investment properties (HK$235m). This implies that the shoe manufacturing business is -- more or less -- going for free.
i tabulated some numbers when the interim report came out, as i was looking to bottom fish this. but the numbers were worse than i hoped and things didnt seem to be turning around. i recall thinking the mgmt comments as quite pessimistic i.e. below the cautiously optimistic level, more like hopefully optimistic.

i rmbr also being puzzled abt the final cash figure stated in the CF statement and that in the BS not matching. saw that in the latest AR. there was some explanation in the notes that the cash is not exactly current cash, or locked up in RMB and not easily convertible. something like that.

on the pluses, essentially debt free, good div payemnts over the years, stable share base, maybe will return cash to investors. on the minuses, div may not be sustainable if CFFO doesnt turn around, maybe co will cont to hoard cash.
Apart from what has already been mentioned, I have no insight regarding their future operating performance. I can only refer on their stated outlook, and based on their past behaviour, decide the amount of reliance I can put on their statements.

Apart from having a clean balance sheet, the key attraction of the company is the management's demonstrated commitment towards creating shareholder value. In my opinion, this is just as -- if not slightly more -- important a consideration one may have when performing due diligence.

Specifically, Kingmaker has been consistent in returning excess cash to shareholders. Between FY2002 and FY2019, the company earned a total of HK$1,519m, and paid out a total of HK$1,257.

The company has stated in its latest interim report that options are being explored regarding their investment property. I take this to mean that they are considering monetizing the asset, which in the event will probably mean a special dividend for shareholders. Although nothing may come of it, such a move is not unprecedented. The company paid a generous special dividend in FY2018 after closing and disposing their Zhongshan plant. The Zhongshan operations were subsequently moved to Vietnam.

Certainly, their "cautiously optimistic outlook for the current financial year" could well turn out to be anything but. In which case, investors are likely to continue selling their shares.

Interim Report FY19:

Annual Report FY18:

Interim Report FY16:
i hope this appears fine...dont know how to paste a table n retain the format properly. anyway some of the numbers i collected. i generally like their corp gov and history of giving back. to add a small point, i also like how the directors remuneration has taken a decent hit alongside op profit, although late and not proportional, but man got to be realistic, how often do you see something like this?

year 2019 2018 2017 2016 2015 2014
Revenue 1,100,649 1,164,873 1,830,267 2,308,161 2,378,003 1,922,803
Operating profit 33,934 253,263 148,452 140,054 102,167 81,107
Total pay of dir. 7,497 14,557 10,172 10,016 10,369 10,008
total pay/Op profit, as % 22.093 5.748 6.852 7.152 10.149 12.339
Kingmaker's attitude towards value creation for shareholders is indeed uncommon. That doesn't mean opmi will definitely enjoy a profitable investment if they ride along, but based on the history of other companies with similar policies, the odds certainly seem higher.

To be able to find companies which may satisfy all of one's investment criteria -- business earning superior returns with long-term moat/growth, management that is generous towards opmi, and yet selling at a knock-out price -- is quite difficult. To say the least. Almost all of the time, an investor has to sacrifice one or more aspect, and hope that the other aspects more than make up for it.

Since the chances for an investor to find the 'perfect investment' is low -- and even when found, the uncertainty of future events mean that there is still no guarantee that the investment will be profitable -- it is prudent to diversify the portfolio to guard against the unknowns.

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