Shrinking Company

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Company Profile

Fu Yu was established in 1978, fabricating injection moulds and plastic injection parts. Today, services have expanded to precision tool design & fabrication, silkscreen printing, heat staking, ultrasonic welding, spray painting and sub-assembly. 

Manufacturing facilities are located in Singapore, Malaysia and China. Segment served includes: Automotive, Medical Networking, Printing & Imaging, Telecommunication and Consumer Electronics. Markets covered are:

Singapore - contributing 24% revenue

China - contributing 57% revenue

Malaysia - contributing 19 revenue in FY2018. 

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Financial 

Revenue had been declining as far back as FY2007.

Earning turnaround started in FY2014 with Operating margin improving to 4.6% in FY2018 (excluding Other Income). 

Other Income is an important source of earning for the company. It comprises mainly: Interest, Rental, PPE sale, Scrap & raw materials sale, Government grants and in FY2013 an asset held for sale of $6.7M. Rental Income is the major component under Other Income, where the asset is rented to a third party, joint venture company Berry Plastics Malaysia Sdn Bhd. 

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Assets

It is noteworthy that Fu Yu Property, Plants & Equipment (PPE) had been shrinking as far back as FY2007. The sharp drop of $36M between FY2007 and FY2008 was due to negative cash-generating units (CGU) in Singapore and China. 

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A second observation is PPE depreciation have trended lower since FY2015 and PPE projected to last longer, measured in years. 

This in turn help to improve the operating financial of the company. 

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As of 3Q19, PPE continue to reduce. This could in part be due to the shifting of Shanghai plant to existing Suzhou facility. In 2020, Fu Yu will be selling Singapore 5 Tuas Drive 1 plant and expanding existing 7 & 9 Tuas Drive 1 facility. 

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OPINION

There is a limit to asset consolidation to improve business performance.

At some point, a company must invest for growth. Whether 7 & 9 Tuas Drive expansion is a turning point is yet to been seen. 

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If the company is planning on expansion in 2020, depreciation is likely to increase in the near future. As to why depreciation is declining or life of PPE lasting longer since FY2016; AR2015 and AR2016 did not shed any light on significant change in depreciation policy.  

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Investment Properties have been declining since FY2013. It is important to track its development since Rental Income is a meaningful contributor to the bottom line.