CHINA STATIONERY LTD (CSL) has had its fair share of bad press, much like other China-based companies listed on Bursa Malaysia. Its circumstances, however, have become murkier by the day.

A year ago, The Edge highlighted the company’s ailing share price as its major shareholder, Lead Champion Ltd, aggressively pared its stake in CSL. Today, Lead Champion’s equity in the company has shrunk to 23.45%, compared with the 74.88% it held when CSL listed in February 2012.

Then, in April this year, the company suffered a fire at its 15,423 sq m plant in Fujian, China, during which 10,000 sq m was damaged. CSL said the fire had destroyed its administrative office, along with its financial records and legal stamps. The incident followed the stepping down of its previous auditors, Messrs Foo Kon Tan Grant Thornton LLP, in January 2014, with no reason given.

Consequently, CSL failed to submit its audited financial statements for the financial year ended Dec 31, 2013 (FY2013), asserting that the records were destroyed in the fire, even though it was a good three months after FY2013’s close. The company eventually filed its statements when Bursa rejected its application for a one-month extension in early July.

Its financials, however, lacked an opinion by its new auditors, Messrs RT LLP, who attached a disclaimer as it was unable to obtain appropriate audit evidence to provide a basis for an opinion.

Just over a week ago, CSL released its third-quarter results ended Sept 30, 2014 (3QFY2014), revealing an 89% year-on-year drop in earnings. Profit before tax fell to RM7.95 million from RM71.21 million y-o-y on the back of a 75% slide in revenue to RM60.92 million from RM242.18 million in 2013.

For the nine months up to Sept 30 (9MFY2014), the company posted a loss before tax of RM187.5 million compared with a profit before tax of RM242.9 million a year ago, while its revenue tumbled 61% to RM285.95 million. The company attributes the decline to the fire incident and economic slowdown.

CSL, which designs and manufactures stationery products such as document files, compact disc holder files, business card holders, albums and customised adhesive tape labels, breaks down its sales components into patented and non-patented products.

Its patented products sales fell 43.9% in 9MFY2014 due to “economic slowdown in global market”, the company says in its filing to Bursa. The company also attributes the 71.8% y-o-y slide in its sales of non-patented products to the fire incident which resulted in the police department sealing off the plant for investigation. “Therefore, there was no production and sale of non-patented products in the second and third quarters,” it says.

But CSL was showing signs of slow growth even before the fire incident, as sales had been dropping since 1QFY2014. For the first three months of the year, its revenue slipped 26% y-o-y to RM163.34 million. In the subsequent quarter, revenue tanked 75.5% y-o-y to RM63.49 million.

Although sales had been on the decline, CSL’s financial statements indicate that its trade and other receivables had risen year-to-date (YTD). While sales dropped to RM285.95 million YTD from RM740.78 million, trade and other receivables increased to RM315.25 million from RM175.65 million.

In comparison, receivables as a portion of sales had skyrocketed to 110% from 23.7% over the nine-month period. Similarly, its turnover ratio is now 0.9 times compared with 4.2 times previously. This means that although CSL is still making sales, its collection period has been delayed from what used to be four months to over a year now.

The company’s cash balance has also declined to RM910.83 million from RM1.27 billion at end-December 2013. It has used some RM362.84 million over the span of nine months, but on what?

The differential lies in the RM212.65 million spent on property, plant and equipment purchases, as well as the RM139.6 million increase in trade and other receivables.

“In September 2014, the company acquired 12 types of 135 units of equipment, costing approximately RMB284.97 million [equivalent to RM151.15 million, at a 0.5304 exchange rate used by CSL] to replace those equipment destroyed by the fire,” CSL says in its result announcement. It expects 4QFY2014 to be more challenging owing to the slow economic environment and “impact by reduced orders from customers affected by the fire incident”.

This begs the question why CSL has spent so much on capital expenditure (capex) amid such a sluggish outlook.

Another concern for shareholders would be that it has been more than seven months since the fire at CSL’s premises and yet it is still unable to make insurance claims for the loss of business income.

CSL’s statements to Bursa reveal that the police investigation into the incident prohibits the entrance of outsiders. The company’s management and insurance representatives have thus been “unable to access the scene to ascertain the total damage caused by the fire incident to date”.

As of October, CSL had received an insurance claim of RMB125.1 million (RM66.4 million), but this does not include the loss of business income for the period required to repair the damage. In addition, the company has incurred RMB206.27 million (RM109.4 million) in total loss on the fire and inventories, while some RMB311.12 million (RM165 million) was spent to compensate customers.

But why have the police sealed off the premises, and why is it taking so many months to conclude the investigation?

Whatever the reasons, CSL’s accounts for FY2013 have been qualified and it was thus classified as a Practice Note 17 company on July 8. As a PN 17 company, it will be interesting to see what regularisation plan it offers within the 12 months from the date of classification.

Be that as it may, the company still has RM910.8 million cash in its coffers. This translates into 73.3 sen per share, based on a share base of 1.24 billion shares. But this has not been reflected in CSL’s stock performance. Year-to-date, its share price has more than halved, closing at 9 sen last Thursday — less than a tenth of its initial public offering price.

So, why doesn’t its management pay out the cash in the form of dividends? Wouldn’t this create better shareholder value?

Clearly, CSL has been running down its cash on capex and trade receivables over the past year. Is this a trend that CSL plans on continuing?

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.

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