Ever-Glory International Group Inc(NASDAQ:EVK)

Web Site
http://www.ever-glory.com
http://www.ever-glory.com.cn/index.asp
Google Finance
Filing


Feb, 03, 2015
2014 Q3 Data

 1.Basic Information
(1) History
Chinese garment manufacturer（江苏华瑞服饰）. Founded by Kang, Yihua(康宜华) at 1993,  starting as exporter, Create its own brand LA GO GO since 2008.  Now wholesale and its own brand both count around 50% of revenue. IPO in US through reverse merger at 2008.

It use a off shore BVI company as a middle layer between the US shell company and Chinese company.  It seems pretty typical.

(2) Management.
Kang, Yihua: CEO and founder
There are many writings about this person on internet and links are provided below. He is very detail oriented and at the same time has quite good vision into future. I have some confidence on him.
His compensation is modest at around $100k/year.

(3) Credit facility.
Several small loans(around $5m each) bear interest rate around 6.5%. Total balance is $50m now, however, it includes around $20m in counter guarantee.

 (4) Insider holding, options, Insider trading info, share buy back.
Kang, Yihua: 4.8m
Ever-Glory Enterprises (H.K.) Ltd: 5.6m. Now 83% controlled by Kang, Huake and 17% controlled by Yan, Xiao Dong.
Kang, Huake(康华珂): Son of Kang,Yihua. Aug 2014, He acquired 83% of Ever-Glory HK. from Yan, Xiao Dong. Previously at 1998, when Kang, Yihua decided to let go Yan, he transferred Ever-Glory HK to Yan. Now Yan is giving back most to his son. 
Yan, Xiao Dong(阎晓东)：400k + 17% of Ever-Glory HK.

 (5).Employee numbers.
6500 employees, main are retail worker and manufacturing worker.

(6) Auditor
Since 2009: GHP Horwath P.C
(7) Industry comparison.
Its revel and partner La Chapelle IPO at HK 2014, Current market cap is around $900m with $1B revenue and $65m net income in 2013. 2014 revenue and income should be like $1.3B and $90m. It   seems more profitable than EVK's retail business. La Chapelle is very close to La Go Go which aiming to the same age group.

(8) Major events.

2. Financial data.

(1) The company controlled by CEO called Jiangsu Ever-Glory acted as guarantee for its debt. The company provided cash of 70% of borrows as counter guarantee to Jiangsu Ever-Glory and it pays back interest. This is a pretty odd arrangement which I don't understand the reason.  The company deducted the counter guarantee amount from equity as it might not be able to get it back. As a result, the company's real debt is over-stated while equity is under-stated. I have added the counter guarantee amount back to reflect more real picture of those two numbers.

(2) At end of 2013, it recorded one time $3.2m in tax reserve for its HK Ever-Glory's Samoan subsidiary. As Sept. 2014, the tax is still not paid out yet.

(3)At Q4 2013, it recorded around $8m in inventory reserve which is not consistent with previous quarters and later quarters. Based on the company 10-K, it write down slow moving or obsoleted material and finished goods aged more than one year. However, since its stores are gradually opened so the inventory in the stores should be gradually built up. Thus unsold goods of one years old should be gradually accumulated. Also the raw materials it has is just several million, so it shouldn't contains a large write off. Although there are some $25m inventory of work-in-progress, I think it is unlikely to have provision in it.  I do feel it is possible that the write off at Q4 is intensional so it can report a smaller income.

(4) There is a report on Internet says that in 2014 the company paid over RMB100m(USD$16m) in tax. At Q3 2014, the company has paid $2m in tax and $5.3m tax payable. The $16m might includeVAT tax.


3. Valuation
Recent price is $6.32. Shares 14.78. Market Cap around $93m. Tangible book value around $5.9. Cash $16m. Debt around $50m. Net debt is about $13m.

For the past, the company had very sold grows, ones the CEO stated that it is aiming an $1.5B annual sale by 2018 which indicate a 40% annual revenue increase from now. It is hard but possible based on past performance. Currently I assume no grows.

Its margin are in steady decrease since 2008 financial crisis. However, net income is still growing well. Current market cap is around 10 times of 2013 net income which excludes the $3.2m tax reserve already.  If Q4 2014 net income is $3m, then it would have $16m net income for full year 2014. It is unknown whether the company will record another big inventory allowance at Q4 2014.


From cash flow point, its 2013 FCF-WC is above $15m which higher than net income caused by some tax reserve not being paid and inventory reserve.

EBIDTA wise, assume $30m/year, $10m in CapX, $2m in interest, 25% interest rate. It comes around ($30-$10-$2)*(1-0.25)=$13.5m in actual annual cash generation.

4. Risk
(1) As a Chinese reverse merger, generally they embed high risk of fraud. However, unlike those which I can pretty easy to tell something is not looking real, so far I have found no evidence or hint that the company has engaged in fraud. Still it is possible that the numbers they provided are not real, but I feel it is a pretty low possibility.

(2)Fashion trend change quickly. Both EVK and La Chapelle was doing quite well in the past by target lower margin, quick follow trend, good inventory management. In 2012, China garment industry seems had a big crisis but those two doesn't affected. It is still unknown how robust these two companies. Whether can they survive new bad retail environment. .  

(2)Although it is quite profitable in the past. From cash flow point, all the cash generated were used to found store expansion. It is risky if inventory is building up and it failed monitor it. If in the future its sales slow down, it might suffer huge loses.  It seems many garment companies in china has encountered this. Current inventory/store is around a quarter sales which seems acceptable. However, whether the 20% allowance for obsolete inventory is too much remains a question.

(3)The CEO and his son now control over 2/3 of the shares outstanding. There is only 4m shares floating. The main purpose for him to put the company on public is to gain recognition of its garment brand. It is hard for this type of company to get a fair valuation by market until it starts to pay out dividend which is unlikely. Also the transactions of him give his stock to Yan at 1998 and now his son got it back, the counter guarantee with JiangSu Ever Glory are scary to foreign investors unless you have faith on Kang's integrity which I do have some though.


5. Conclusion
The company is very cheaply priced. Unless it is a fraud, it should worth double the current price.


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