Xinyinhai Tech (PINK:XNYH)

Item 8.01

Other Events

HARBIN, China, November 28, 2011 /PRNewswire-Asia/ -- Xinyinhai Technology, Ltd. (OTC Bulletin Board: XNYH), a market leader in China's fast-growing financial documents printing industry today announced Harbin Golden Sea Technology Printing Co, Ltd., a subsidiary of Xinyinhai Technology, Ltd, with excellent reputation and product quality and solid strength, won a bid from the Department of Finance of Heilongjiang province standing out of many bidders. The company is expected to sign a sales contract at the end of 2011 with the Department of Finance of Heilongjiang Province and establish a long-term cooperation with it, which will help the company enlarge market share and increase sales figures. Sales are expected up 12%, enhancing the company's overall strength and visibility.

Over the longer term, the continued revenue growth in our printing services business will require further capital investment. As China’s banking industry rapidly modernizes, our customers will demand higher quality products similar to those available to the banking industry in Europe and the U.S. Our ability to meet that demand will determine the long term growth of our business. Immediately, the development of these new products will require substantial capital investment. For that purpose, we secured a $2.9 million collateralized loan during the third quarter of 2009, which we replaced during the third quarter of 2010 with a $4.43 million collateralized bank loan with an interest rate of 5.841%. We applied $748,379 to improvements in our plant and equipment during the second half of 2009. In 2010 we used a portion of the funds to increase our inventory in anticipation of growth, and used another portion to temporarily increase our loan to Heilongjiang Jindi. At the end of 2010, however, we had signed commitments to purchase $1,334,715 in plant and machinery. Since Heilongjiang Jindi repaid its loan in full early in 2011, we will apply a portion of those funds to payment for that capital improvement.

We held $3,692,174 in cash and equivalents at December 31, 2010, and $2,199,189 in trade receivables, of which only $376,205 were more than 90 days old. We have a $4.5 million debt payment due in 2011, but our liquid assets are more than adequate, and we expect to pay the loan in full at the end of June. We are cash positive in our operations, are operating profitably and hold over $6.4 million in fixed assets free of lien. Accordingly, we expect to be able to secure bank financing when our operations warrant capital expansion. For that reason, we expect our liquidity will be sufficient in the next year to fund our ongoing operations as well as our near-term growth.

2010 second quarter business conditions have not changed since the first quarter filing.                    

                                                                   3 months 2010 vs. 2009     6 months  2010 vs. 2009

Revenues (Note 3)		$	1,888,981			$	2,111,659			$	4,063,359			$	4,508,640
Cost of revenues			(1,202,001	)			(1,354,153	)			(2,565,291	)			(2,875,181	)
Gross profit			686,980				757,506				1,498,068				1,633,459
Operating expenses
Selling and distribution expenses			47,369				66,697				118,358				187,963
General and administrative expenses			242,169				217,784				391,460				503,700
Total expenses			289,538				284,481				509,818				691,663
Income from operations			397,442				473,025				988,250				941,796
Interest income			1,779				5,465				2,998				6,047
Other income			1,737				7,423				3,012				16,411
Finance costs (Note 4)			(63,315	)			(14,891	)			(102,521	)			(15,088	)
Income before income taxes and
noncontrolling interests			337,643				471,022				891,739				949,166
Income taxes (Note 5)			(39,275	)			(58,001	)			(103,520	)			(122,675	)
Net income before noncontrolling interests			298,368				413,021				788,219				826,491
Net income attributable to noncontrolling interests			(30,755	)			(46,012	)			(80,643	)			(92,193	)
Net income attributable to Xinyinhai Technology, Ltd. common stockholders		$	267,613			$	367,009			$	707,576			$	734,298
Net income before noncontrolling interests			298,368				413,021				788,219				826,491
Other comprehensive income/(loss)
Foreign currency translation adjustments			63,115				1,578				63,239				(16,844	)
Comprehensive income			361,483				414,599				851,458				809,647
Comprehensive income attributable to
noncontrolling interests			(37,217	)			(46,274	)			(87,122	)			(90,509	)
Comprehensive income attributable to
Xingyinhai Technology, Ltd. common
stockholders		$	324,266			$	368,325			$	764,336			$	719,138
Earnings per share attributable to Xinyinhai Technology, Ltd. (Note 6) : basic
and diluted		$	0.01			$	0.02			$	0.04			$	0.04
Weighted average number of
common stock outstanding			19,484,029				19,484,029				19,484,029				19,484,029

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?
- Chinese filings match respective SEC filings.(In process)

 

Criteria	Meets Criteria	Notes
Top 100 Auditor	Yes, Top 100	PKF Certified Public Accountants, member firm of the PKF International Limited network of legally independent firms.
Auditor Located in U.S.A	No	Hong Kong
Satisfactory Internal Controls	Yes	Based on his evaluation, Mrs. Tian and Ms. Du concluded that the Company�s system of disclosure controls and procedures was effective as of March 31, 2010 for the purposes described in this paragraph.
No Legal issues	Yes	None Found
Customer Concentration	n/a	n/a
Cash Flow Ratio is Greater than 1	No	Negative; (Due to increase in trade receivables)
Cash Ratio is Greater than 1	No	0.51
Buying Back Stock/Insider Buying	No	n/a

 

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests and enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task.  Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings.  Odds are we will identify some promising companies that will fail this litmus test.

Added to the GeoSpecial list on October 22, 2009 @ $0.38
 
Catalyst: Stock was selling it book value per share; XNYH provides services to China’s banking sector, Speculation that account receivable situation would improve.
Peak performance: Reached a high of $0.45 on October 22, 2009
Current Price: $0.21
 
Current road block:  Lack of investor awareness; Financial printing equipment operations are remain weak; Company has still not exhibited significant EPS gains during a time when China has experienced substantial growth:

"In the first quarter of 2010, which ended on March 31, 2010, the effect of the recession was most dramatic in our equipment distribution business, where revenues declined by 73% to $147,168.  The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived."

Remains on the GeoSpecial list.  XNYH still sells below its book value share of $0.70 and maintained profitability in its 2010 first quarter. The EPS numbers have been meager, but the company's new printing facility is fully operational, and management expects the traditional growth of its financial note printing business to be renewed. We are not quite sure how dramatic the growth will be and have attempted to contact management on several occasions, but to no avail.  It is our opinion that investing in XNYH is a high risk situation until the company reports meaningful EPS and improves its communication with shareholders.

Liquidity appears to be intact:

"Harbin Golden Sea’s business plan calls for significant investment in the growth of Harbin Golden Sea during the next twelve months. We are purchasing new equipment for our new production facility. We also plan to invest in the development of additional product lines. To accomplish those goals, during the third quarter of 2009, we obtained a $2.9 million bank loan collateralized by our real property. The loan bears interest at 5.31% per annum and is due in the third quarter of 2010. We are utilizing the borrowed funds to implement the capital improvements necessary for our growth. Because the loan amount is substantially less than the value of our real property and because we are operating profitably, we expect to be able to refinance the loan when it matures.

"With the proceeds of our bank loan, we held $2.0 million in cash and equivalents at March 31, 2010. We will have no debt payment obligations until the bank line comes due in the third quarter. And, in accordance with customary banking practice in China, we expect that the bank loan will be extended when it reaches maturity, provided that our financial results are satisfactory to the bank. For that reason, we expect our liquidity will be sufficient in the next year to fund our ongoing operations as well as our near-term growth."

Excerpts from Xinyinhai's 2010 first quarter filing:

Business segment near-term outlook is mixed:

The recent global recession reduced demand for capital goods in China. Since late 2008, this situation has had a negative impact on both of our business segments. In the first quarter of 2010, which ended on March 31, 2010, the effect of the recession was most dramatic in our equipment distribution business, where revenues declined by 73% to $147,168.  The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived. The decline reversed a surge in equipment sales that we had experienced in 2008, and reduced this business segment to a 7% contribution to our overall revenue during the first quarter of 2010, a level below even the 13% level we experienced in 2007 and 2006. The future of this business segment will depend, in part, on the success of the economic stimulus initiated by the Government of China.

Revenue from our printing business, on the other hand, was modestly higher, increasing by 9% to $2,027,210.  The printing segment of our business had declined in 2008 and 2009, in part due to the weakening of the Chinese banking industry, as many of our customers were conserving cash pending stabilization of the international credit markets. The decline also occurred because we moved our entire production operation to a larger facility at the end of 2008. The move necessitated delays in production, while our equipment was in transit, which in turn interfered with our sales effort, as our customers delayed orders until we could demonstrate that our facilities were up and running. Today, however, our new facility is fully operational, and we expect the traditional growth of our printing business to be renewed.

Over the longer term, the continued revenue growth in our printing services business will require further capital investment. As China’s banking industry rapidly modernizes, our customers demand additional product offerings similar to those available to the banking industry in Europe and the U.S. Our ability to meet that demand will determine the long term growth of our business. Immediately, the development of these new products will require substantial capital investment. For that purpose, we secured a $2.9 million collateralized loan during the third quarter of 2009, and applied $748,379 to improvements in our plant and equipment during the second half of the year. The growth in first quarter printing revenue indicates a first step toward realizing the benefit of that investment. In addition, our backlog of firm orders at March 31, 2010 for 2010 delivery was approximately double the backlog level at March 31, 2009, indicating that we should be able to sustain growth for the remainder of the current year.

Dilution seems to be a low risk event:

With the proceeds of our bank loan, we held $2.0 million in cash and equivalents at March 31, 2010. We will have no debt payment obligations until the bank line comes due in the third quarter. And, in accordance with customary banking practice in China, we expect that the bank loan will be extended when it reaches maturity, provided that our financial results are satisfactory to the bank. For that reason, we expect our liquidity will be sufficient in the next year to fund our ongoing operations as well as our near-term growth.

Via a 10Q filing Today, Xinyinhai Tech Ltd reported dismal 2009 third quarter results. Sales declined 38.7% to $1.9 million and EPS fell 66.7% to $0.01.  There was weakness in both of its product lines.

Equipment distribution business

"The current global recession has reduced demand for capital goods in China. Our revenue during the three months ended September 30, 2009 decreased by 39% to $1,921,858 from $3,143,423 achieved during the three months ended September 30, 2008. The decrease was most dramatic in our equipment distribution business, where revenues declined from $857,892 during the third quarter of 2008 to $224,422 during the third quarter of 2009.

The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived. The future of this business segment will depend, in part, on the success of the recent economic stimulus initiated by the Government of China."

Printing business

"During the three months ended September 30, 2009, the revenue from our printing business decreased by 26% to $1,697,436, compared to $2,285,531 during the same period of 2008. The decline occurred, in part, due to the weakening of the Chinese banking industry, as many of our customers are conserving cash pending stabilization of the international credit markets. The decline also occurred because we moved our entire production operation to a larger facility at the end of 2008, which interfered with our printing business."

There are two glimmers of hope

1. Xinyinhai Tech anticipates an improvement in the outlook of its print business which has higher margins than its equipment distribution business:

"Today, however, our new facility is fully operational, and we expect the traditional growth of our printing business to be renewed."

 2. The 10Q also shed light on its expansion plans:

"Our business plan calls for significant investment during the next twelve months. We plan to purchase new equipment for our new production facility. We also plan to invest in the development of additional product lines. To accomplish those goals, during the third quarter of 2009, we obtained a $2.9 million bank loan collateralized by our real property. We will utilize the borrowed funds to implement the capital improvements necessary for our growth."

Due to the stock selling under its book value per share of $0.59 and its receipt of financing, we will still code XNYH as a GeoSpecial, albeit not with the greatest degree of confidence. At these prices it seems worth hanging on to for a quarter or two as the China stimulus plan is still in full force.

Note: We are concerned that the Company has yet to respond to our multiple interview requests.

On October 15, 2009 the GeoTeam® published an article that highlighted U.S. listed China stocks selling at a discount to book value. Xinyinhai Tech Ltd (OTCBB:XNYH) is one of those stocks. A few our readers have also found this stock and suggested we take a look at the story. After some due diligence, we coded XNYH as a GeoSpecial on October 22, 2009 at $0.38.

Xinyinhai Tech Ltd is a leading participant in China’s financial notes printing industry.

Positive points to consider

• In only the past twenty years, China has assumed an important position in the world financial markets. China’s financial services industry has generally lagged behind its international peers.
• China’s government is moving to modernize the industry.
• The movement toward higher quality documentation with advanced technological aspects, such as anti-falsification technology, is creating an increased demand for the level of services that the Company has traditionally offered.
• XNYH was experiencing steady EPS growth before the recent financial crisis.

	2008	2007	2006	2005
GAAP Revenue	$13.7 M	$12.1 M	$7.8 M	$5.4 M
GAAP EPS	$0.15	$0.11	$0.07	$0.04
Tax Rate	9.0%	0.0%	0.0%	10.0%
Fully Diluted Shares	20.2 M	24.3 M	18.9 M	18.0 M

Points of Concern

• The global recession hit the Company hard as it's customers consist of banks and insurance companies. For the six months ended June 2009, revenues fell 40.0% to $4.5 million while EPS fell 60.0% to $0.04.
• Dilution. The business plan calls for a significant investment in the growth of Xinyinhai Tech during 2009. It plans to purchase new equipment for its new production facility and introduce additional product lines.
• Accounts Receivable Problem. "Our $332,070 in net cash flow from operations during the six months ended June 30, 2009 was less than half of our net income of $734,298 during the same period." The primary reason for the discrepancy was the $576,298 increase in our trade receivables during 2009. Our customers are primarily Chinese banks, and the restriction of international credit lines has adversely affected their liquidity. To assist them in meeting their cash obligations, we have extended the credit terms afforded to the majority of our customers."
• The Company hasn't disclosed the amount of capital it is attempting to raise, making it difficult to estimate potential dilution.

At this juncture, we are more concerned about dilution than with business risk. As business conditions and flow of credit have drastically improved in China, so should the fortunes of the customers targeted by Xinyinhai Tech.

Although it seems that Xinyinhai Tech was another stock priced to fail, it has successfully weathered the storm. Until we actually receive information on fund raising initiatives, the GeoTeam® is willing to devote some capital to XNYH due to the belief that favorable industry trends and an improving banking environment will gradually result in a resumption of EPS growth.

The accounts receivable issue has also garnered our interest. The GeoTeam® contends that this issue could improve, being that Xinyinhai Tech's customers are likely in much better financial health. This is a factor that we are hoping will help the stock at least attain its book value per share of $0.66 ($0.58 excluding minority interest). The stock has already had a nice run from around $0.20, yet still has a trailing tax adjusted P/E of only 7.

We will request an interview management.

Factors that may ultimately effect investor sentiment

• Will EPS improve moving into the second half?
• When and how dilutive will XNYH capital raising efforts be?
• How fast will capital be deployed?
• Will there be an existence of dilutive securities?

Additional thoughts from a reader

"XNYH did 4 cents in the first 6 months which is down from 10 cents last year in the first 6 months, but they had a change into a bigger factory and thus had a bit of a transition time now. My guess is that they will do way better than 4 cents in the second half but even with another 4 cents the stock is cheap at 40 cents."