Concerns Behind Hengxin Technology’s Thunderous Growth

Hengxin Techonology (SGX: I85) is a manufacturer of radio frequency coaxial cables for mobile communications and other telecommunications equipment. The company is based in Yixing city in the Jiangsu Province of China.

Operating results for the first quarter

The company had just released its first quarter results yesterday and had enjoyed a 52.9% jump in its revenue to RMB308.8 million compared to a year ago. However, with its cost of sales growing at a faster rate of 57.6%, the company’s gross profit margin dropped from 19.2% to 16.8%. Hengxin Technology’s management cited a much tougher competitive environment as being the main reason for the drop in its gross profit margin.

That said, the company’s net profit did manage to grow by 68.1% to RMB19.8 million as operating expenses had increased at a slower pace.

On the surface, things look great for Hengxin Technology with both its top- and bottom-line showing strong double-digit growth. However, if we look at its cash flow statement, the huge increase in sales couldn’t be turned into cash as the company’s operating cash flow remains negative; most of the increase in sales had become trade receivables instead, meaning to say that the company’s customers would only be paying Hengxin actual cash sometime in the future.

Hengxin’s average trade receivables turnover days increased from 193 to 211. In other words, it now takes about 7 months on average for its customers to pay their bills – such a long collection time for sales is not exactly healthy for any company. Management claims that the delay in payments was mainly due to the outstanding balances of 3 telecom projects which are still uncompleted. The company added that it is not worried about any credit risk from its customers.

The balance sheet of the company remains strong with Hengxin still in a net cash position. However, its cash balance has dropped by about 45% from three months ago to RMB 203.2million. The decrease was mainly due to an increase in working capital as more credit was extended to customers.

Foolish Bottom Line

Going forward, the company’s management is expecting margins will continue to be under pressure as telecom operators – Hengxin’s customers – might see some decline in their average revenue per use.

Although the company has achieved great growth in its revenue and net profit, credit risks stemming from the aforementioned increase in trade receivables might be a concern for investors. Hengxin Technology closed yesterday at S$ 0.19 per share. No dividend has been declared this quarter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.