Monday, April 5, 2010

Xinyinhai Technology (XNYH) ready for a comeback

Xinyinhai Technology, Ltd. (XNYH) is a holding company that has two subsidiaries.  Xinyinhai Technology owns 100% of the registered capital of Winner Sea Group Limited ("Winner Sea"), which owns 90% of the registered capital of Harbin Golden Sea Technology Printing Co., Ltd. ("Harbin Golden Sea").

Winner Sea is a business company organized under the laws of the British Virgin Islands in 2006.  It has conducted no business.  It is a holding company whose only asset is shares in Harbin Golden Sea that represent 90% of the registered capital of that company.  The remaining 10% of Harbin Golden Sea is owned by Xie Guihong.  Ms. Xie is a member of the Board of Directors of Xinyinhai Technology.

Harbin Golden Sea Technology Printing Co., Ltd. is a private company located in Harbin, China. Founded in 1998, Harbin Golden Sea has developed into a leading participant in China's financial notes printing industry.  Harbin Golden Sea is a company to which the Chinese government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in China.

The company has in recent years developed a prestigious clientele, and its share of the market for financial notes printing in China is growing.  The three primary factors responsible for Harbin Golden Sea's growth have been:

The company provides printing services whose quality equals the highest standards worldwide. Harbin Golden Sea imports state-of-the-art printing equipment from Germany, and installs on its advanced software systems, such as anti-falsification software. The company's investment in technology means that few competitors can offer China's financial industry the level of service that Harbin Golden Sea offers.

Harbin Golden Sea's focus on providing high quality service has distinguished it from its competition. In 2000 Harbin Golden Sea received Certification of Compliance with the ISO 9000 International Standard.  In 2003, Harbin Golden Sea's quality management system was accredited under ISO 9001-2000, recognition that Harbin Golden Sea's business practices meet the world's highest standards. In 2006 Harbin Golden Sea achieved GB/T28001 Certification of Occupational Health and Security Management System as well as ISO14001 Environment Management System certification.  Harbin Golden Sea has been awarded "Best Performance" and named "Most Creditworthy and Reliable" enterprise by the Chinese government every year since 2001.

The company's marketing acumen has brought it into exclusive relationships with many of China's largest financial institutions and government agencies, including Bank of China, Agricultural Bank of China, and the Postal Savings Bank of China.

Harbin Golden Sea also earns a portion of its revenue (approximately 13% in 2009; 32%in 2008) from its position as a distributor of plasma arc cutting machinery and consumable parts manufactured by Hypertherm, Inc. of New Hampshire, U.S.A.  Hypertherm's plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.

The earnings per share in 2009 were $ 0.05 compared to $ 0.15 in 2008, which means that in the last quarter they had a very small profit. The global recession in 2009 has reduced demand for capital goods in China.  During last year, this situation had a negative impact on both of the company's business segments.  Overall, the revenue during 2009 decreased by 37% to $8,627,306 from $13,686,332 achieved during 2008.  The decrease was most dramatic in the equipment distribution business, where revenues declined by 74% to $1,147,696 during 2009 from $4,397,281 during 2008.  The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived.  The decline reversed a surge in equipment sales that the company had experienced in 2008, and returned this business segment to a 13% contribution to our overall revenue during 2009, a level similar to their experience in 2007 and 2006.  The future of this business segment will depend, in part, on the success of the economic stimulus initiated by the Government of China.

Revenue from the printing business fell by 19% to $7,479,610 during 2009, compared to $9,289,051 during 2008.  The decline occurred, in part, due to the weakening of the Chinese banking industry, as many of the customers are conserving cash pending stabilization of the international credit markets.  The decline also occurred because the company moved their entire production operation to a larger facility at the end of 2008, which interfered with the printing business. Today, however, the new facility is fully operational, and they expect the traditional growth of their printing business to be renewed. 

Over the longer term, the continued revenue growth in the printing services business will require further capital investment.  As China's banking industry rapidly modernizes, customers demand additional product offerings similar to those available to the banking industry in Europe and the U.S.  The ability to meet that demand will determine the long term growth of the business.  Immediately, the development of these new products will require substantial capital investment.  For that purpose, the company secured a $2.9 million collateralized loan during the third quarter of 2009, and applied $748,379 to improvements in plant and equipment during the second half of the year.  At March 24, 2010 they had $2,213,667 in backlog of firm orders, all of which is for delivery during 2010. At March 17, 2009 they had $1,147,761 in backlog. A sign of improving.
The 32% gross margin realized by their subsidiary, Harbin Golden Sea, on sales in 2009 was lower than the 37% gross margin realized in 2008.  Although, as has always occurred, the gross margin on printing operations in 2009 (33%) was significantly better than the gross margin on  equipment distribution operations (21%), the primary reason for the overall decline in gross profitability was a reduction in the profitability of printing operations.  The companies business plan contemplates that gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business.  During 2009, however, three factors caused margins from printing operations to fall below that standard:
- the disruption in the Chinese banking industry forced to price products more aggressively;
- The move at the end of 2008 to a larger manufacturing facility with upgraded equipment increased annual depreciation expense by 52%and the reduction in sales volume led to inefficient use of the new larger facility.

As the Chinese banking industry is moving towards stabilization, the company expectation is that it will be able to revive their sales growth and return their printing operations to the levels of profitability that they sustained prior to the international credit crisis.

The book value of Xinyinhai Tech Ltd (XNYH) is $ 0.75 and the stock is trading around $ 0.20. The problem is that it is thinly traded. I expect earnings per share this year to be around $ 0.10 (2008: $ 0.15). At these price levels this stock could be interesting for the long term investor and a price of $ 0.50 at the end of the year could be a real possibility.


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