LY Corporation Limited

LY Corporation Limited ("LY Corporation" or the "Company") is placing out 75.848m shares comprising 61.174m new shares and 14.674m vendor shares at $0.26 each. There is no public tranche, as such, providing little motivation for me to review it ...💤 The IPO will close on 29 Jan 2018 at 12pm and commences trading on 31 Jan 2018. The market cap will be S$127m. 

Principal Business

The Company was started by Tan Kwee Chai in 1976 with 8 employees more than 40 years ago and has since grown to a company with more than 1,000 employees. It has become one of Malaysia's leading manufacturers and exporters of wooden bedroom furniture. As of 15 Dec 2017, the Company operates 15 factories and warehouses and sold its products to overseas dealers.

The Company manufactures quite a wide array of bedroom furniture and you can see some of the products below. You can also find out more about the history and its products from their website here.

Competitive Strengths

This is what the Company says about itself in the prospectus... i will cut and paste it below.

Financial Highlights

You can see from the audited figures that the revenue and profits of the Company is pretty stable. Using the latest exchange rate of 1S$ to 3MYR (for ease of calculation), the revenue for FY 2016 was S$95.8m and the EPS based on the enlarged share capital was 2.97 cents. 

Assuming 2017 revenue grow by 17% (based on 1H2017 growth) and net margin drops to 12%, the revenue will be = 287,379 x 1.17 = MYR 336m. Net profit of 12% will be = 12% x MYR 336 = MYR 40m. EPS will be around 8.24 sen and  2.75 Singapore cents. 

That translate into a listing PER of 9.45x based on 2017 projections. (I am guessing and not privy to the projections)

Use of proceeds

Dividend Policy

This is probably quite rare . . .  (first time i see it...) the Company intends to distribute a special dividend of 3% of the placement price as special dividend to be approved withing 3 months of listing. This means that investors don't have to wait for a full year to "enjoy" this special dividend. This translate into 0.78 cents or a "yield" of 3%. Basically the Company is trying to tell you "I don't really need your money". 😂

In addition, the Company will pay out 40% of its net profits after tax as dividends for 3 years from FY2018 to FY2020. Assuming an unchanged EPS of 2.75 Singapore cents, the dividend payout will be 1.1 Singapore cents. That translate to a yield of 4.23 Singapore cents, which is very decent in today's environment. Do note that the Company expects admin expenses to rise in FY2018 due to the listing (page 136).

Shareholders

The founding family will continue to control the Company with a 72% stake. Shares will be tightly controlled.

What I like about the Company

• Simple to understand and "boring but stable" business - The business is simple and straightforward to understand. Maker of bedroom furniture. While it concerns the bedroom, it is definitely not a "sexy" business 😂, hence don't expect it to trade at high valuations. However, having said that, will internet change this industry? Internet will probably change how you buy the bed but you will still need a comfortable bed for a good night sleep. Unless everyone starts using the tatami, people will continue to need wooden beds for their homes
• The Independent directors subscribed for the shares - at least the independent directors bought shares at the IPO. While the amount applied for is not material, it helps  provides alignment of interest with the public investors (page 26 of prospectus)
• Audited by Ernst & Young one of the more established accounting firms
• Cash rich with little debt- The Company is pretty well run with stable revenue and profits. It doesn't have much debt at all, with a low debt to equity ratio of 0.05. I love cash rich company with no debt right. I also like the fact that the family did not dividend out the cash prior to listing but share it with new investors coming in.
• Dividend paying stock - The Company has "declared" that it will be a dividend stock from the onset, right within 6 months of its listing, it will declare a 3% dividend, followed by a decent dividend for the next 3 years. I believe the Company is signaling to investors that it will be a dividend paying stock 
• Long moratorium - This is probably one of the longest moratorium i have seen. The founding family (page 63) agreed to be locked up for a period of 4 years, probably sending a signal to let investors know they are in this for the long haul

Some of my concerns

• Competition and single product class - This is a competitive industry with low barriers of entry. The Company's sole focus is on bedroom furniture. Investors will have to assess for themselves whether they are comfortable with this single exposure. 
• Lack of brand awareness and ownership - The Company is an ODM and OEM and doesn't have its own brand. While this helps ensure no conflicts of interest with the end customers, it also means that it has to be a "low" cost producer, otherwise, the brand owning customers will look for cheaper sources of production.
• Sustainability of business model - Bedroom furniture uses woods as its primary raw material. With an increasing investors' focus on sustainability, the Company may have to review its process continuously to ensure they are also sourcing from sustainable sources. This may have an impact on their business in future.  
• Revenue is in USD while manufacturing cost is in MYR - The major market for the Company is the United States and a depreciating MYR is good for its business as its products will be cheaper. The listing in Singapore will probably results in a new foreign currency being introduced. US$:S$ for revenue and S$:MYR for its operating expenses. This probably adds a layer of complexity on forex exposure and the Company may have to re-look at its forex and hedging strategies.
• Future growth - I am not sure where the future growth of this Company will be. The Company mentioned that it intends to start expanding to China, this is still preliminary and execution of this strategy will be critical if the Company wants to have a "new growth angle" (page 136). 
• Family owned business - at its heart, it is still a family run business where the father has now passed the baton to its son. The CEO is currently 31 and will implement fresh ideas while the dad will be his guiding voice. Other relatives includes Tan Ai Luang and Tan Kwee Lim. Picture of the relationship below (sorry forgot to bring my "pen" home). Public investors will hold 15% while the family will own about 72% of the Company. I have nothing against family owned business as long as they are professionally run even though it will be difficult to implement any personnel changes to the company. The flip side is that if there is a "quarrel", then it will bring disruptions to the operations. 

Peer valuation

There aren't many similar companies listed. Those that i can recall include Man Wah holdings delisted in 2009 and relisted in Hong Kong and HTL International (Hwa Tat Lee International) that was privatised in 2016. The only remaining closest peer is probably Koda.

  

Assuming LY Corporation trades at 10-12x PE, the fair value will be around 27.5 cents to 33 cents. I am giving it a higher valuation due to its dividend paying policy.

Conclusion

This is a stable, boring and cash rich business where it pays a dividend of between 3-5% each year. The founders have done whatever they could to sweeten the deal for the IPO, including paying out a 3 cents "dividend" within 6 months (my projection) of IPO. It has also established a dividend policy of paying out at least 40% of its net profits for the next 3 years. You can see from through the actions of the family that they are not "greedy" and did not dividend out the cash prior to its listing but shared that with incoming investors. The Company managed to generate a decent profit over the last few years and has little debt on its balance sheet. 

My only "grief" is that they did not have any public tranche. Other than that, it is a 2 chilli for me except that i am not a "fan" of this industry... 

Strawpoll

The website is down. Will put up the poll later tonight...