Jinpan International released their 2012 Q1 on 11 May 2012. It was another good quarter, but the same old story—investors are just not excited about this stock.2012 Q1Net sales for 2012 Q1 were $42.8 million, a 43.1% increase from $29.9 million in the same period last year. Net sales for 2011 Q4 were $64.1 million. Net sales for the 2011 Q3 were $66.6 million. Sales for 2011 Q2 were $58.3 million. The increase in sales in Q1 was due to increased domestic transformer sales and increase international sales.In the first quarter, domestic sales accounted for $33.8 million, or 79.0% of net sales, compared to $27.8 million, which also represented 93.0% of net sales in the same period last year. In 2012 Q4, domestic sales accounted for $59.8 million, or 93.3% of net sales. In 2011 Q3 domestic sales accounted for $59.1 million, or 88.7% of net sales. In Q2 domestic sales accounted for $46.1 million, or 79.1% of net sales. On the conference call, JST stated that they had increased their customer base by over 20% inside China with more than 2,000 customers at the end of 2012 Q1. JST’s ability to produce both customized and standardized transformers has gained them customers that previously they could not reach. Net sales outside of China for the quarter were $9.0 million, or 21% of net sales compared to $2.1 million, or 7.0% of net sales for the same period last year. In 2011 Q4, net sales outside of China were $4.3 million, or 6.7% of net sales. In 2011 Q3, net sales outside of China were $7.5 million, or 11.3% of net sales. In 2011 Q2, net sales outside of China were $12.2 million, or 20.9% of net sales. Net sales outside of China jumped this quarter, which is a good sign. One of the factors that helped was a fairly large shipment of wind-power transformers shipped to a European OEM. Of the $9M of net sales outside of China, $6.5M was to the US and $2.5M was to Europe. This is also a big change as previously Europe had accounted for 90% of sales outside of China. When the European economy recovers, this should lead to an overall increase in sales outside of China (as long as the US customers don’t drift away), which is a good trend long term. JST still believes that international sales in 2012 will be on par with 2011, so not much growth there. Considering the continuing situation in Europe (which is one of their two primary international markets with the US being the second), this is probably a realistic estimate. Currently, JST is producing materials for 3 OEMs, but are always looking to add OEMs to their client list. JST is working to get qualified with a fourth OEM (European company). As noted last quarter the prototype that JST sent to the OEM was rejected. JST is in the process of completing internal testing on the prototype, and now plans to ship the prototype to the OEM in September, which is much later than previously forecast (on the 2011 Q4 conference call, JST stated they planned to submit a second prototype in 2012 Q2). They are now cautiously optimistic that by the 2013 Q1 or Q2 they will be qualified with the fourth OEM (on the 2011 Q4 conference call, JST stated that they hoped to be qualified with the fourth OEM by the end of 2012).Gross profit for 2012 Q1 increased 43.9% year over year to $15.8 million from $11.0 million in the same period last year. 2012 Q1 gross profit margin was 36.9%, compared to 36.7% in the prior year period. Gross profit in 2011 Q4 was $22.2M. 2011 Q4 gross profit margin was 34.6%. Recall that in 2011 Q4 JST sold some silicon steel to one of their customers as a favor. Without the lower margin sale of silicon steel, the GM would have been 35.7% in 2011 Q4. Gross profit margin in 2011 Q3 was 37.5%. 2011 Q2 gross profit margin was 38.1%. 2011 Q1gross profit margin of 36.7%. So, the Gross Margin which was in a negative trend has rebounded. JST is forecasting a GM of 33% - 35% for the entire year, so GM is expected to drop in the coming quarters. The relatively high GM in 2012 Q1 was due to the shipment of ‘a lot’ of customized transformers and international products. If JST can keep their margins in the 33% - 35% range, they will be fine.As previously noted, JST has expanded their manufacturing capacity to 14 million KVA. As such, they are pursuing more standardized transformer opportunities and less customized transformer opportunities. While standardized transformers have a lower gross margin, the overall market for them is much greater and more stable than customized transformers. In 2011 Q4, standardized transformers accounted for 60% of sales while in the previous quarters, that number was about 35% of sales. In 2012 Q1, the mix was approximately 50-50. While the lower margins are of the standardized transformers is not the greatest, it does allow JST to ship more products, and, more importantly, I think, it makes them a bigger player in the market since they are approaching the “one-stop source” for electrical products in China. In the future, this should lead to increased sales. JST does not currently have a projection for the total size of the standardized transformer market in China—they are focused on capturing a greater share of the existing market.JST expects that wind-related transformers in 2012 to be approximately equal to 2011. JST expects the total China sales to increase in 2012 from 2011.The gas switch gears accounted for minimal revenue in 2011 (I mistakenly had $21M in my last update). JST’s goal for gas switch gear revenue in 2012 is $2M - $3M. Sales in 2012 Q1 were $1.6M, so it appears that they are well on their way (delivery of switch gears was only $150K however). I see this initiative working well for JST, and I think it will deliver more than expected.Selling and administrative expenses in the first quarter were $10.9 million, or 25.5% of net sales, compared to $7.8 million, or 26.0% of net sales in the same period last year. Selling expenses increased in the first quarter as a result of increased sales. Administrative expenses increased due to higher Research and Development expenses and increased salary expenses resulting from the Company's implementation of its expansion plans. Selling and administrative expenses in 2011 Q4 were $16.2 million, or 25.3% of net sales. Selling and administrative expenses in 2011 Q3 were $16.5 million, or 24.8% of net sales. In 2011 Q2 selling and administrative expenses were $13.8 million or 23.7% of net sales. Pretty stable here.Operating income for the first quarter increased 52.6% to $4.8 million, or 11.3% of net sales, from $3.2 million, or 10.6% of net sales, in the same period last year. In 2011 Q4, operating income was $5.9 million, or 9.2% of net sales. In 2011 Q3, operating income was $8.4 million, or 12.7% of net sales. In 2011 Q2 operating income was $8.4 million. Net income for the first quarter increased 44.6% to $4.0 million, or $0.24 per diluted share, from $2.7 million, or $0.17 per diluted share, in the same period last year. First quarter net income as a percentage of net sales was 9.3% compared to 9.2% in the same period last year. In 2011 Q4, net income was $5.4 million, or $0.33 per diluted share (8.4% of net sales). In 2011 Q3, net income was $8.4 million, or $0.51 per diluted share. In 2011 Q2 net income was $7.3 million, or $0.44 per diluted share. Balance SheetAs of March 31, 2012, the Company had $12.6 million in cash and cash equivalents, compared to $24.2 million at December 31, 2011. As of September 30, 2011, the Company had $13.8 million in cash, cash equivalents and restricted cash compared. Cash, cash equivalents at the end of 2011 Q2 was $8.3 million. In 2011 Q1, cash, cash equivalents, and restricted cash was $25.2 million. The big decrease in cash corresponds to the big decrease in bank loans as JST made an $11M loan payment in 2012 Q1 (see below).Notes payable in the 2012 first quarter decreased to $2.2 million compared to $13.6 million at the end of December 31, 2011. Total bank loans outstanding at March 31, 2012 increased to $31.6 million as compared to $23.0 million at December 31, 2011. Total bank loans outstanding at September 30, 2011 was $28.5 million. Total bank loans outstanding at June 30, 2011 were $31.0 million. Total bank loans outstanding at March 31, 2011 were $15.7 million.The Company's accounts receivable on March 31, 2012 totaled $114.4 million, compared to $110.4 million at December 31, 2011. Accounts receivable on at the end of 2011 Q3 totaled $110.3 million. Accounts receivable at the end of 2011 Q2 totaled $96.3 million. Accounts receivable at the end of 2011 Q1 totaled $77.5 million. 80% of accounts receivable are less than one-year old. DSO is 165 days, and the overall age of the receivables has remained the same. JST’s policy is that their salesmen’s commissions are tied to collected receivables. JST stated that they were comfortable with the receivables.The accounts receivable dollar total is growing slower than the sales growth, so for now this is okay, but it will remain worth watching.At the end of 2012 Q1, inventory was $44.2M. At the end of 2011 Q4, inventory stood at $37.6M. This increase is mostly due to the ramping up for standardized transformer sales. As with accounts receivable, this is a good metric to watch to make sure it doesn’t get out of hand.Financial Outlook For the full year 2012, the Company currently anticipates net sales growth of 20-25% to $262-$273 million, gross profit margin of 33%-35%, and net income growth of approximately 17-22% to $27.8-$29.0 million. (No change for 2011 Q4.)At the end of 2012 Q1, JST had a backlog of approximately $112 million, which was unchanged from Feb 29th 2012 (does that mean no sales in March or they shipped the same amount as they sold in March?). JST expects to ship 90% of the backlog by end of the fiscal year. So, if the sales for 2012 Q1 represent what was actually shipped ($42.8M) and JST ships 90% of the existing backlog by the end of the year, that means that JST has already accounted for $143.6M of their $262-$273M 2012 target. And, Q1 is generally a slower period for JST, so, it looks good so far. For reference, as of September 30th, 2011, the Company had a backlog of approximately $100 million compared to $91 million as of June 30th, 2011, $79 million as of April 30, 2011 and $60 million as of December 31, 2010. Capacity utilization at the Haikou plant is 80-85%. Capacity utilization at the Wu-Han plant is nearly 100%. The first phase of the Guilin expansion is underway and expected to be completed in late 2012. JST is targeting to begin producing the first cast resin transformers at the Guilin plant by the end of 2013 Q1. When the entire expansion is complete, it will add 12M KVA and double the cast resin transformer capacity, doubling the current cast resin transformer capacity.Two analysts and one private investor (not me) highlighted the fact that JST stock gets no love. Considering their execution, growth rates, and all around good financial situation, the lousy stock price and miniscule PE (4.88) is ridiculous. One recommendation was to switch the dividend payout to a quarterly basis. In addition, JST Investor Relations have plans to target institutional investors in the upcoming months. My fear (shared by the aforementioned private investor) is JST gets bought out by private equity at a ridiculously low price. All in all, JST has allayed most of my concerns by turning in another good quarter. The lack of reaction in the stock price is disappointing, but after reviewing the numbers and listening to the conference call, I am increasing my investment and purchasing my third allotment. The potential reward far outweighs the risk at this point for me unless there is a global meltdown, which is always a possibility.
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