TCP International HoldingsWe have major concerns about TCP International Holdings Ltd. (NYSE:TCPI), and we believe the company could even be heading for insolvency, based on our research.

Audit Committee Investigating TCP International Holdings Chairman

Recently, TCPI delayed its reporting of Q3 2015 results, but provided preliminary results, where they stated:

“Preliminary financial results for the third quarter 2015 are expected to include revenues within the range of $89 million to $91 million, with diluted earnings per share within the range of $0.00 to $0.03 per share.  Revenue decreased in the quarter, compared with the third quarter of 2014, due to lower sales of both CFL and LED products primarily due to lower demand in North America and Asia.”

The company’s preliminary numbers missed both revenue and EPS (revenue estimates were $118.5M and EPS estimates were $0.04).

The stock has already fallen from near $2.25 to under $1.00 on the company’s earnings.

In addition, the Audit Committee is investigating the company’s Chairman. The press release is linked above, and here is some select language from it:

“The Audit Committee of TCP’s Board of Directors is conducting an internal investigation concerning the scope and propriety of payments made by its Chairman with his personal funds relating to TCP’s business. The Audit Committee also is investigating whether relationships exist between its Chairman and Vice-Chairman and certain vendors.  The Audit Committee has dedicated significant resources to its investigation, including the retention of independent legal and accounting advisors, in order to conduct a thorough and expeditious review.”

Our On the Ground Due Diligence on TCP International Holdings

TCPI has three main manufacturing facilities.  Based on our recent on the ground due diligence, all three of these facilities appear to be in bad condition and we believe TCPI to be very close to insolvency, if not there already.

Here are the three facilities we visited:

  1. Yangzhou Facility

The Yangzhou facility mainly manufactures high margin LED lighting.

Based on our on the ground due diligence, the orders from this facility have substantially decreased in 2015.  In April, 2015, this facility had around 1800-2000 assembling workers.  At the end of October, 2015, the facility only has about 1300 assembling workers who don’t appear to have a busy schedule.  We have heard that this facility is not hiring now and employees are still leaving the facility for a better jobs in other factories.

Towards the end of 2013, this facility used to have around 4,000 employees.

  1. Huai’an Facility

The Huai’an facility mainly manufactures low margin CFL lighting.

Based on our on the ground due diligence, the orders at this facility have substantially decreased in 2015.  The employees told us that orders have decreased starting this past March.  They also told us that from this May to October, the decrease accelerated quickly.  This past April, this facility had around 1,600-1,800 assembling workers with busy schedules.  Now, we observed that it only has around 1,200 assembling workers.  We have also observed that current salaries have decreased almost 50%.

  1. Zhenjiang Facility

The Zhenjiang facility manufactures both CFL lighting, LED lighting products and other lighting products as well.

In the first half of 2015, this facility used to employ around 1,500 assembling workers.  Currently, it has around 1,300 assembling workers. This facility is recruiting some employees for specialty positions.  We have heard that orders are decreasing at this facility as well, however it doesn’t seem to be as noticeable as the other two facilities.

While we have a very small speculative short position in TCPI, we want those reading to know that we are presenting these facts with the intention of simply disseminating these developments and giving investors transparency and insight as to the company’s business operations at the current time. We are not advocating taking one position over another, rather our goal here is to present the facts in order to allow investors to make their own decisions.

Our on the ground due diligence tells us that the total number of TCPI employees has dropped dramatically over the past year. It also tells us that orders seem to be slowing and that TCPI’s second quarter may be effected. We believe that insolvency or bankruptcy are two potential risks for the company at this stage, based on what we observed. The obvious caveat we have is that if the company were to undertake some type of restructuring, the case for bankruptcy or insolvency may be taken off the table.