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Sunday, January 01, 2006

Sunwin International Nutraceuticals (SUWN) Q2

Q2 SEC filing

(again, hat tip to Joel)

For the period ending Halloween 2005. Share count is 49 million shares.

Balance Sheet (comparison to the end of fiscal year).
Cash increased to $2.4 million (from $1.7 million).
AR held steady (while allowance dropped slightly).
Inventories dropped slightly.
Prepaid went up slightly.

PP&E went up to $3.6 million (from $2.7 million).
Due from related parties went up slightly.
Total assets up slightly.

Loans payable is down.
AP held steady.

Current ratio didn't change much.
Equity went up to $7 million from $5.8 million.

Income Statement
Q2 revenues are up 28% from prior year.
First half revenues are up 12% from prior year.
Gross margins: 33% (32% for the first half).

All the expenses are up, but Q2 operational income is more than double the prior year.
First half operational income is up 47%.

There's a huge benefit from taxes greater than operational income. Taxes were obviously very low in Q1.

If we assume a 32% tax for Q2, we would have income before minority interest of $356K. Net income would then be $279K for Q2 or about 0.4 cents per totally diluted share which would annualize to about 1.64 cents per year.

If we assume a 32% tax for the first half, we would have income before minority interest of $656K. Net income would then be $509K for the half or about 3/4 cent per totally diluted share which would annualize to about 1.5 cents per year.

Putting a P/E of 15 on this would result in a stock price of 22.5 cents, which is pretty close to where it's at. However, this has been a fast growing business. Will it continue to be? I'd have to say a definite "maybe".

Cash Flow Statement
If we take net cash from 6 months of operations and subtract both depreciation and minority interest, we end up with $1.55 million which is noticably larger than net income of $1.15 million.

If we take net cash from 6 months of operations and subtract capex and minority interest, we end up with $777K vs net income of $1.15 million. This is not surprising since we know they're investing in expanding the business across all three segments, if I recall correctly (or at least 2 of them). This is in the Notes, page 24.

In other cash flows, there was a decrease of $176K in "due from related parties" and paydown of loans of $287K. There was an additional benefit of $53K from exchange rate (one more reason to like Chinese businesses right now).

So cash flows looks great.

Inventories are now leaning more towards raw materials. About the same reserve for obsolete inventory.

Already covered China Direct Investments.

Segment Info for 6 Months:
The Chinese medicines revenue is up 28.8% (to $2.2 million). Gross margins are up to 42% now due to new products and improved sales skills. Also the Chinese central government rule mentioned in last post. They believe they are the first to complete the requirement. They plan to add a natural dietary health food series (which seems odd for PRC).

Animal medicines segment revenues are up 35% (also to $2.2 million). Gross margins decreased to 31.5% from 32% due to raw material costs. This industry also has the new Chinese central gov rule. Of 2,700 mfgers, they believe only 800 could pass.

Six month return on assets for both of these segments combined are probably a bit lower than 16%

The stevioside segment revenues are down 9%. There were delays with retooling, additional equipment needed (the $206K mentioned below?), and inspection delays, it wasn't operational until Nov 2005 (rather than Sept as expected). They had to resell repurchased stev in the meantime. Operating margins are 20%. Six month return on assets are probably a bit lower than 9.3%

Subsequent event: SUWN hired 3 consultants for business development, selling Stevia and Chinese herb products in the US and Canada. 910K options at 15 cents for 5 years, covered by the equity compensation plan.

$655K invested for leasehold improvements for veterinary medicine mfg.

$1.34 million invested for stevioside facility. $206K of additional unexpected investment needed.

Overall higher selling expenses mostly due to increased commissions. Also travel and entertainment costs. Shipping costs increased a bit. Advertising and promotion decreased a bit.

G&A went down by $44K due to decrease in business development expense, repairs and maintenance, bad debt expense. These were offset by increase in travel and entertainment of $56K and other stuff like phones and office expenses.

Tax credits from the collection of value-added taxes on certain products.

The big tax credit was due to a tax waiver from the local Chinese government through Oct 2005 (should continue to the end of 2005). Also they don't expect taxes in 2006.

Cash balances are:
US: $370
China: $2.4 million

Raised $903K of cash from sale of stock. That doesn't show up on the cash flow statement!

Shandong Shengwang Pharm Corp is often advanced money for purchasing stuff to effect buying power. At Oct 31, 2005, Shandong owed SUWN $1.2 million for PP&E advances to be reflected in the long-term assets (this area was what was restated in the past from related party loans).

Still no change in switching Qufu to a joint venture.

Still no legal proceedings.

No off balance sheet arrangements.

Due to issues with the auditors here, I would need more margin of safety for this company. Right now it's selling for what I'd consider to be a P/E of about 15. The company has been growing and they're putting a lot of investment into the business. But things can and do go wrong. I consider this to be only semi-audited, at best.
worth following

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