PRELIMINARY INFORMATION MEMORANDUM PRANDA JEWELRY PUBLIC COMPANY LIMITED

Transcription

1 PRELIMINARY INFORMATION MEMORANDUM PRANDA JEWELRY PUBLIC COMPANY LIMITED Finansa Limited January 2001

2 PRANDA JEWELRY PUBLIC COMPANY LIMITED ( Pranda ) Investment Highlights Exports have been a key contributor to the recovery of the economy since the 97 crisis and a key element in maintaining stability in the country's Balance of Payments. The authorities recognize that Thailand needs to emphasize the export sector, especially the area of manufactured exports. Thailand's principal manufactured exports have been electronics and related products, processed foods, textiles and jewelry. Gems and jewelry ranked as Thailand s 7th largest (individual) export industry in 1999, with a 2.7% share of all exports. Thailand has a competitive position in the international jewelry market, ranking third behind Hong Kong and Italy in terms of global jewelry exports. Thailand boasts a large, skilled and established labor force and a growing presence in the international trading of gems. The industry experts have estimated that there are over 1,000,000 skilled gem cutters and some 300,000 technicians skilled in gem cutting in Thailand. The devaluation of the Thai Baht has brought Thailand s labor costs more into line with those of the southern region of China (used as a manufacturing base by jewelry manufacturers in HK). Labor costs account for around 3% of the total production cost of medium to high-end jewelry and 10% of the total production cost of a low-end product. Pranda, a SET listed company, is Thailand's largest jewelry manufacturer and exporter. The company was established in 1972 and currently operates four manufacturing plants (three located in Thailand and one located in Vietnam). The company's main focus is finecut colored gemstone and diamond jewelry in gold or silver settings, mostly for the mass market. 75% of its production is exported. The current production capacity of Pranda's four factories is close to 5 million pieces per annum. BOI privileges for its factories in Bangkok have expired; however, Pranda still has tax exemption privileges for its factories in Nakorn Ratchasima and in Vietnam. For Nakron Ratchasima, Pranda has an 8 years corporate income tax exemption followed by a 5-year 50% exemption. For its factory in Vietnam, at least 50% of total production must be exported while the rest can be sold in the (potentially significant) local market. The 100% corporate tax exemption for the Vietnam factory will expire within this year. Pranda has created brand names for each of its product categories. Modern product designs, standardization of production systems, quality raw materials and finished products, high R&D investment and punctual delivery are key factors underlining the company s brands. Pranda has established distribution networks in several countries. The main purposes of the networks are to enlarge the customer base, provide after sales service to customers and observe the changes in consumer trends, so that Pranda can alter its marketing strategies rapidly. Previously, the subsidiary companies carried substantial inventories (which contributed to the financial problems of the company). Currently, these companies only act as Pranda s sales agents rather than wholesale distributors.

3 A pool of high skilled labor is arguably the most valuable asset of Pranda. The company has a total of 3,000 skilled workers. More than 95% of the workers have been trained by the company. Pranda has established many personnel development projects, various skill training program and non-formal educational projects for its employees. This benefits the company in terms of higher product quality, greater skill levels and most importantly, loyalty to company. The company has achieved consistent quality production on a mass production scale (20,000 to 30,000 pieces per order). This ability is important to its core customers, such as Quality Value Convenience (QVC), a 24-hour TV Shopping Network in USA. The company encountered severe financial problems in the wake of the Baht devaluation in Pranda was hit by exposure to foreign currency loans, a drop in demand and excessive inventory levels (in large part due to an unsuccessful venture into wholesaling). Since 1997, the company has been undergoing financial restructuring with debt rescheduling and a (planned) debt write off. Other measures undertaken include inventory recycling, the downsizing of local and overseas subsidiaries and an increased emphasis on exports. The company is projecting modest sales growth over the next five years (6% p.a.), a steady gross margin of 40% (which is below historic levels) and an expanding net margin (with net income benefiting from lower interest expense and a tight rein on SGA costs). Net earnings are projected to jump from Bt284 million in 2000 to Bt344 million in The principal risks identified are the competitive nature of the international jewelry market, swings in customer taste and spending power (accentuated by a slowdown in the US economy), family dominated ownership and management and lack of transparency in the trading of raw materials (notably gems). Trading in Pranda shares since 1997 has been extremely thin. The shares hit a low of Bt6.6 in the middle of last year. The last trade was on 12 December 00 (9,000 shares traded at Bt14.5). The last meaningful volume was seen between July and August, last year at prices at around Bt8.5. Transaction Overview We first identified Pranda Jewelry as a potential investment opportunity in 1997; however, no deal was possible at that time due to delays in the debt restructuring process. In September 2000, Pranda completed the debt restructuring process (with 14 banks and financial institutions) involving the conversion of Bt1.7 billion of short-term loan to a 10- year loan. Pranda has since commissioned Nava Vickers Ballas to be its financial advisor and is aiming to raise Bt 400 million (or approximately US$10 million). The funds will be used as follows: - 1) Bt 300 million for reducing debt amounting to Bt 425 million (through a Dutch Auction), resulting in a (potential) gain from debt forgiveness of Bt 125 million. 2) Bt 100 million will be used to support working capital and expansion of the franchise business.

4 However, early this year, we have been updated by Pranda s management that the private placement will be scaled down to Bt150 million since Pranda s performance and prospect is better than expected. The company can generate enough cash to support its business expansion in the coming years and most of the major banks has turned down Pranda s proposal to buy back the outstanding debts. Pranda has changed its planned to raise the funds of only Bt150 million to buy the debts of Bt million, mostly from the small banks. There would be a further discussion on the terms and conditions once Pranda has finalized all figures.

5 Background Pranda was established in 1972 with an initial registered capital of Bt 25 million to engage in exports, generally. The company s management foresaw an opportunity in the gems and jewelry business in Thailand and decided to focus the company's activities in this area. Initially, Pranda concentrated on jewelry exports to Europe. Later in 1981, the company extended its export operations to include the United States. In 1986, the management decided to build its new office and factory on a 26-rai site on Bangna-Trad Road, on the outskirts of Bangkok. The company became a public company and was listed in The Stock Exchange of Thailand in Today, Pranda Jewelry is one of the largest fully integrated jewelry manufacturers and exporters in the world. Pranda operates four core business units covering manufacturing, wholesale distribution, agents and retail brand development. Pranda has established four manufacturing plants (three in Thailand and one in Vietnam) to produce a range of "medium" to "high-end" jewelry products for the mass market. The company s plants have a combined production capacity of nearly 5 million pieces per year. Thailand's Gems and Jewelry Industry: A Competitive Edge In the 1960s, domestic gem supplies provided the impetus for development of the Thai market. Currently, the local supplies of colored gemstones are scarce; however, Thailand s jewelry industry is a major consumer of colored gemstones from around the world, making Thailand the world s largest colored gemstone trading center as well as Asia s largest manufacturer of jewelry. The impressive growth of Thailand s gemstone trading and cutting industry was in large part due to the development and international recognition of the skills and productivity of the Thai labor force. Within the region, Hong Kong responded to competitive challenge from Thailand by shifting production to China and utilizing China s inexpensive labor force. Thailand's skill sets are arguably higher than those found in China, though Chinese labor costs are competitive (though less so following the Baht devaluation). For this reason, Thailand needs to emphasize value-added products over low-cost products. Design is an area of critical importance in high-end jewelry products. Consumers tend to notice a piece of jewelry for its design before considering its quality. Thai jewelry is still lacking in the area of design. In this regard, Thailand cannot compete with Italy, which is the largest exporter of jewelry in the world. Thai designers have to overcome the limitation of local style and taste to design and produce jewelry which is truly competitive on the world market. We would highlight the following competitive advantages of Thai gems & jewelry industry:- Highly developed skill and cost-effectiveness of Thai labor. Ability to deliver large scale production of a consistent high quality. Accessibility to ruby and sapphire sources in countries such as Burma, Sri Lanka and Cambodia. Thailand has become a major consumer of raw materials from all over the world.

6 Jewelry products are identified as a major export item and promoted by the Thai government s Department of Export Promotion. Thai government is relaxing the current tax requirements on gems and jewelry businesses such as granting of value added tax (VAT) exemption for imports and sales of diamonds, precious stones, costume jewelry and other raw material, and awarding an eight year income tax holiday for jewelry supporting industries etc. The gems and jewelry industry has been a powerful export earner for the country with the segment ranking seventh amongst Thailand s top ten exports, registering sales of US$1.5 billion in Jewelry accounted for 55% of the export total followed by diamonds at 23%, gemstones and pearls at 18%, costume jewelry at 4% and synthetic gems at 1%. The largest markets for exports of Thai gems and jewelry are the United States, Israel, Belgium and Japan. Thailand s export of gems and jewelry has slumped since the economic crisis in Sales have fallen by 25% since 1995, reaching a low in 1998 at US$1.3 billion. Industry watchers attribute the slide to a combination of the liquidity problems faced by Thai exporters, reduced demand in Asian markets and stiff competition from other countries. Thailand s solution to staying competitive in the global market has been to upgrade its production processes through improved technology, the development of new design skills, increasing marketing efforts to establish Thai brand names in the world market and cost reduction. In order to reduce costs, Thai companies are looking to source competitively priced gemstones and raw materials from Africa to process and re-export, while the Board of Investment (BOI) is lobbying for the removal of duties on necessary import materials. The recovery in export sales experienced over 1999 is forecast to continue as Asian demand recovers and Thai companies continue to target new markets. Thailand s Gems and Jewelry Exports Figures in millions of U.S.dollars Country * 2000 United States Israel Belgium 134, Japan Germany Hong Kong United Kingdom Switzerland France Italy Total 10 countries 1, , Others Total Exports 1, , ,038.6 Growth rate 23% 14% n/a Source: Department of Business Economics, Ministry of Commerce * Figures for 2000 are from January to August.

7 Pranda offers a wide range of products Pranda s main products are fine-cut colored gemstones and diamonds designed with gold or silver settings. Its products consist of rings, earrings, brooches, lockets, necklaces, bracelets, and pins bearing either customers brand names or Pranda's own brand names. Pranda concentrates on "medium to high-end products" where it can command higher margins. The definitions of "low" versus "high-end" jewelry are those adopted by the company and are those applicable to the mass market. Pranda Products are designed for specific markets, to meet the tastes and demands of customers in each country. Pranda has five main product lines are as follows: Promotion Made of: Metal content: Price range: Positioning: Target: Gold & precious stones 14K gold US$25 US$30 Low income North America Medium & Medium-High Made of: Gold & precious stones Metal content: 14K-22K gold Positioning: Medium & medium-high income Price range: US$50 US$60 Target: French & Southern Europe, North America, England & Northern Ireland, Germanic & Scandinavia Silver Made of: Metal content: Positioning: Price range: Target: Prima Gold & Century Made of: Metal content: Positioning: Price range: Target: Commemorative Made of: Metal content: Positioning: Price range: Target: Silver & precious stone 925 silver stering Low, medium, medium-high income Lower than US$10 North America, Far East, South East Asia, Russia, French & Southern Europe, Germanic & Scandinavia Pure gold 24K gold Medium & medium-high income US$120 US$150 Middle East & South Asia and Kingdom of Thailand Gold, silver & bronze Varies to orders All ranges of income Varies to orders Kingdom of Thailand

8 Pranda s products can be broken-down as follows: Product Line Break-down as per 1999 sales Margin (%) Export Sales: Promotion 9.9% 33.4% Medium & Medium-high 42.3% 45.5% Silver 27.0% 38.3% Prima Gold 5.5% 28.6% Total Export Sales 84.8% Average 40.7% Domestic Sales: Prima Gold 6.9% 49.6% Commemorative Items 2.3% 19.2% Total Domestic Sales 9.2% Average 42.0% Other Product & Vietnam Export 6.0% 13.6% Total Sales 100.0% Average 39.2% Pranda adopts a cost-plus approach to pricing its jewelry products. The cost of sales in each year depends upon the product mix. The cost structure for each product category can be broken down as follows: Product Line Direct Material Direct Labor Overhead Promotion 91.6% 3.1% 5.3% Medium & Medium-high 92.1% 2.7% 5.2% Silver 80.2% 10.1% 9.6% Prima Gold 96.0% 2.2% 1.8% Commemoratives 89.1% 4.9% 6.0% Building Brands In order to sustain its growth and add value, Pranda has (gradually) increased its emphasis on brand development. Pranda acquired its first brand-name H. Gringoire through buying the brand from a French jewelry company in Pranda has positioned the H. Gringoire as a medium-high, diamond and gemstone on an 18K gold setting, product. The product has been well received in the French domestic market. The price range for this brand is US$150 to US$250. Subsequently, the company created a new brand - Prima Gold, for the Thai domestic market. Prima Gold has been positioned as a retailer of prestigious 99.99% gold jewelry ornaments. Introduced before the financial crisis, its sales outlets were strategically located in the leading department stores in Bangkok and in many provinces in Thailand. With some success domestically, Prima Gold was then introduced aggressively in other Asia Pacific countries and the Middle East. At one point, Prima Gold had been launched through 157 shops and outlets throughout the region, though the number of outlets has fallen since the crisis. Most of the Prima Gold outlets are operated through a franchise system. For this reason, any future expansion of Prima Gold outlets can be done without significant, additional funding from Pranda. Prima Gold also includes Prima Diamonds, diamonds with a pure gold setting, in its product range.

9 In addition to the above mentioned brand names, there are several other brand-names which have been introduced by Pranda: a) Voyage - a range of accessory products made from gold plated silver embellished with synthetic cubic zirconia and gemstones. The product has been launched in Germany, Austria and Switzerland. In the future, the company plans to expand its marketing network to cover the whole of Europe and the U.S.A. b) Century Gold - a designer jewelry in 22K hollow gold c) Gold Gaya and Gold Mart - 24 carat gold accessory products. Currently, these two brand names are launched only in the Indonesia market. d) Crystalina - a costume jewelry produced by Pranda s subsidiary company, Crystaline Co., Ltd. e) Eighteen K 18K accessories targeting teenagers. A substantial and varied manufacturing capability As indicated earlier, Pranda has set up three factories in Thailand and one in Vietnam. Low-priced products are made in Nakornrachsima and in the Vietnam plant due to their relatively low labor costs, while the factories in Bangkok produce jewelry items which require higher skills (and which are higher priced). Taken together, Pranda has both a substantial and varied production capability. More specifically: 1) The first factory is located the Bangna-Trad highway. It produces moderately priced items such as promotion, medium & medium-high gold and gem jewelry and silver jewelry. Its annual production capacity is 1.2 million pieces. The current utilization is about 540,000 pieces. 2) The second factory, located adjacent to the first factory, is the Super Gold Factory. Meeting high international standards, this facility manufactures medium to high range gold jewelry. Its production capacity is 1.2 million pieces per annum. The current utilization is about 540,000 pieces. 3) The third factory is located at Suranaree Industrial Zone in Nakorn Rachasima province with privileges granted by Thailand's Board of Investment. It produces jewelry items made from silver for the mass market. The production capacity is 2 million pieces per year, however, the actual production is 900,000 pieces. 4) The fourth manufacturing plant is in Vietnam. Commencing production in 1997, this facility produces mainly silver and low carat gold jewelry. It was granted promotional incentives by the Vietnamese Government to sell up to 50% of its production the domestic market. Total production capacity is 250,000 pieces per year. The actual production is around 143,000 pieces. In addition to the above four factories, Pranda also has access to production capacity in Indonesia through its affiliate company, P.T. Pranda-SCL (Pranda currently holds 50%

10 stakes of the Company). This is a gold and silver jewelry manufacturer located in Jakarta. The production capacity is 2 million pieces per annum. Developing a design and product development capability It is widely recognized that to ensure future success, the Thai jewelry industry has to continue to move away from being a low cost manufacturing base. This will require the industry to develop in the areas of design and quality. Pranda has been building its design team for many years and design and product developments are identified as a competitive strength. In terms of design, Pranda compiles information on consumer demands and tastes in each target market and uses this as an input for product design. In terms of production, the second quarter (April-June) and fourth quarter (October-December) are typically the periods of high sales in the jewelry industry. In the two to three months before these seasons, buyers are active and in turn Pranda prepares its samples in conjunction with this buying pattern. Where Pranda is an OEM manufacturer, the company works closely with the design teams of its customers. Extensive distribution networks Around 75% of Pranda's products are sold in overseas markets. Pranda has set up four wholesale distributors and five agents in major cities around the world. This network aims to expand the customer base, provide after sales service to customers and enable the company to identify changing consumer trends in each market. The four distributors are as follows: - Pranda North America Inc: The company is 100% owned by Pranda. Pranda North America takes care of the marketing activities in Canada and the U.S.A. - Hourdequin Gringoire Sarl: Hourdequin was Pranda s second overseas marketing arm. The office is located in Paris and is responsible for the France market. - Pranda U.K. Ltd.: It is 100% owned by Pranda Jewelry. This distributor covers only the United Kingdom. - Crystaline North America Inc: The company is 100% owned by Pranda Jewelry. Crystaline North America is the distributor of costume jewelry and silver jewelry in the USA and Canada. Diversification of target customers Gems and Jewelry demand in any specific country is dependent on the strength of the underlying economy. During when the Thai economy was strong, Thailand accounted for 48% of Pranda s sales. However, since 1997, sales in Thailand have fallen, reflecting the weakness in the economy. Pranda breaks down its target markets into seven zones as follows:

11 Zone Broken-down per 1999 sales 1) Germanic & Scandinavia 7.3% 2) English & Northern Ireland 9.0% 3) French & Southern Europe 18.7% 4) Far East, South East Asia, and Russia 10.2% 5) North America 39.5% 6) Middle East & South Asia 6.1% 7) Kingdom of Thailand 9.2% Family management Members of the Tiasuwan family have run Pranda since the company was formed and occupy key positions. This has meant stability in management, though raises the question of the division between the company's interests and the family s interests. However, it is also recognized that the lack of management transparency needs to be addressed by ensuring that an independent executive is installed to monitor the transaction flows (notably in areas such as purchases of raw materials). Pranda s executive team can be named as follows: 1) Khun Prida Tiasuwan Chairman 2) Khun Pranee Khunprasert Vice Executive Chairman-Product Development 3) Khun Pramote Tiasuwan Vice Executive Chairman-Technology 4) Khun Prapee Sorakraikitikul Vice Executive Chairman-Operation 5) Khun Sunanta Tiasuwan Vice Executive Chairman-Finance 6) Khun Manas Baramichai Vice Executive Chairman-Organization & Human Resources Historical Financial Performance Pranda experienced impressive compounded sales growth of 27% p.a. from The main reasons were the launch of Prima Gold in the local market and the setting up of the wholesale businesses in the U.S., Germany and Japan. However, between 1997 and 1999, sales declined by 13% p.a.. This was mainly due to the slowdown of the Thai economy and the downsizing of its wholesale operations in the U.S., Germany and Japan. In addition, Pranda saw its access to credit curtailed by banks and financial institutions. The gross margin from was pretty much stable at c.32%, before rising to 37%- 40% for the years At the net level, income was worsening since 1995 mainly due to: a) A substantial inventory write-off at Pranda North America (PNA). During , Pranda expanded its wholesale business in the U.S. market. As a result, PNA carried a significant amount of inventory to supply its retail customers. Pranda was not successful in penetrating the wholesale business. As s result, the company downsized its subsidiary in the U.S. and changed PNA from a wholesale distributor to being only a sales agent. PNA no longer requires inventory. At present, PNA is used to support Pranda s main customers which are QVC, Home Shopping Networks etc.

12 b) A rise in interest expenses. When expanding its wholesale and retail businesses, the company financed the associated inventory with debt (at high interest rates). Interest expense accounted for 13%-14% of total sales in , compared to 4%-6% in After the Baht was floated, total liabilities increased from Bt1.2 billion in 1993 to Bt2.0 billion in c) Bt400 million set aside for bad debts. Due to the new accounting policy required by the Stock Exchange of Thailand. Pranda wrote-off significant bad debts in Measures Taken to Survive the Crisis Pranda has undertaken a number of measures to counter the effects of the decline in local purchasing power and the deterioration in cash flow, resulting from the crisis. These measures include: Pranda collected the overstocked and obsolete products from its local and overseas subsidiaries for recycling into new items. As these inventories were acquired before the Baht devaluation, this will help to reduce the cost of goods sold in the short run. Pranda negotiated with creditors to convert its short-term loans into long-term loans. The debt restructuring process was finalized in September Pranda has agreed with 14 financial creditors to reschedule repayment terms over 10 years. Total loan outstanding is Bt1.7 billion. Pranda plans to close or downsize its unprofitable local and international subsidiaries as part of the overall cost reduction process. Pranda is placing more emphasis on exports to compensate for the loss of local revenue. New markets have been identified and developed, including Eastern Europe, Latin America, Central Asia and South Asia. These countries will be the next targets for exports. After completing the debt restructuring, some banks and financial institutions have offered to write down a portion of the outstanding debt. Pranda has targeted buying back loans outstanding of Bt 425 million for Bt 300 million. Together with the proceeds from private placement, this should help to reduce the interest expense and strengthen its balance sheet. Financial Projections Based on the Financial Projection prepared by Pranda s management (see below), revenues for the period is projected to grow at an average of 6% p.a.. Pranda expects to achieve and maintain gross margins of 32% of sales throughout the projection period. EBITDA is targeted at 20%-21% of total sales. Each year, Pranda expects to generate cash from operations of not less than Bt350 million, which is enough to cover interest and principal repayments as per the debt restructuring schedule. At the net level, the net margin is projected to increase from 10% in 2001 to 17% in 2006, mainly due to lower interest expenses and a tight control of SG&A costs.

13 Investment Concerns Pranda competes internationally in a product prone to swings in taste and affordability (note the shift in customer preference from yellow to white metal and the prospect of a slowing US economy eroding consumer confidence Jewelry is a labor-intensive business and it is difficult and time consuming to recruit and train staff. This is an obstacle for Pranda if the company would like to expand its production base. However, the company is well-experienced in managing, training and retaining labor. Employee turnover has been less than 1%. Security is a perennial concern in terms of theft. By all accounts, Pranda s factory in Bangkok is equipped with a good security system, though we will need to review security at the other Pranda factories. Management is family dominated and there is a (potential) lack of transparency in the trading of raw materials (notably gems). As indicated earlier, an independent executive is required to monitor the transaction flows. Share Prices and Volume on the SET Trading in Pranda shares since 1998 has been extremely thin. The shares hit a low of Bt6.6 in the middle of last year. The last trade was on 12 December 00 (9,000 shares traded at Bt14.5, P/E of 0.8x estimated 2000 earnings). The last meaningful volume was seen between July and August last year at prices at around Bt Pranda J ewelry Pcl. - Market Price

14 Lists of the Listed Thai Exporters Name Sector Market Cap. (Bt million) P/E (times) a) Muramoto Elect Electrical Products 1, b) Delta Electronic Electronic Comp. 24, c) Hana Micro Elec. Electronic Comp. 14, d) KCE Electronics Electronic Comp. 2, e) Thai Union Frozen Food & Beverages 8, f) Thai Storage Battery Vehicles & Parts

15 Financial Statements Historical Financial Statement Projected Financial Statement