Investor Central: China Taisan Tech Group Holdings Ltd — Do customer complaints point to problems with quality control?

SINGAPORE, Jan 20 — China Taisan Technology Group Holdings, a Singapore Exchange Mainboard listed fabric manufacturer, expects the selling price of its performance fabric to face pricing pressures due to a decrease in demand and an increase in competition.

It is no wonder that the stock is not covered by any broker as its trading price is as low as S$0.035 (RMRM0.090) with trading volumes of around 50,000 shares a day.

Adding to trouble, the group received some complaints from its customers that certain products delivered in 2014 were not up to their specifications.

On November 14, China Taisan announced that it received complaints from a customer regarding chemical odour of the fabric.

The complaints were based on reports obtained from a national accreditation body in Germany, DAkkS and a testing and certification body, TUV SUD.

In fact, other major customers also have submitted similar complaints to the company.

China Taisan confirmed issues with the new products’ fabric after it carried out an internal investigation.

The issues were striped fabric flaws and printing flaws, fabric colour, chemical odour, and poor elasticity of spandex fabric.

It is now collaborating with the five affected customers who have been associated with the company since 2006.

China Taisan Technology Group Holdings Ltd recently announced earnings for Q3 FY14:

Revenue: +43.8 per cent to RMB 301 million

Profit: +529.1 per cent to RMB 45.7 million

Cash flow from operations: (RMB 143.8 million) vs (RMB 41.4 million)

Revenue rose as the average selling price of performance fabrics increased by 64.2 per cent to RMB 75,800/tonnes.

The increase is mainly due to the high selling price for the two new products which were released during Q1.

It sold 3,856 tonnes of performance fabrics which is 10.7 per cent lower than previous year quarter, and the fabric processing services also witnessed 18.1 per cent decline in quantities sold to 1,289 tonnes.

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1. Do customer complaints point to problems with quality control?

China Taisan received complaints from its customers about chemical odour in the fabric.

After investigating the complaint, it is still unable to ascertain the extent to which its products are affected.

We assume it has quality control measures in place before the final product is delivered to the customer.

FY13 annual report states that its products are able to conform to international standards such as AATTC, ASTM, DIN, BSI and JIS.

It is also one of the few to become certified as Oko-Tex Standard 100 compliant since 2005.

In fact, it is accredited by the CICC Conformity Assessment Services Co., Ltd with ISO9001:2000 and ISO14001:2004.

In September 2008, its subsidiary, Jinjiang Lianjie, has been awarded the title of “Fabrics China Sportswear Fabrics Pioneer Plant” under The Fabrics China Project, which was initiated by China Textiles Development Center and China Textile Information Center in 1999.

This makes us wonder about a slippage in quality control.

Perhaps, the company can enlighten us about the details.

2. What are the chances that it will lose old customers to competitors?

Five customers that complained about the issue include Quanzhou Fulihua Light Textile Trade Co Ltd, Shishi Taishan Textile Development Co Ltd, Quanzhou Suixing Weaving Co Ltd, Quanzhou Tianhong Textile Co Ltd, and Quanzhou Hongyu Light Textile Co Ltd.

Will it lose these nine-year customers?

3. What is the monetary loss due to this issue?

These defective products form a significant portion of 6,573 tonnes of products delivered during FY14, according to the company.

It commenced sale of new products from March 2014.

But, it is not in a position to provide any specifics of its financial position.

Q3 results highlight that it sold 10,119 tonnes of performance fabrics and 3,013 tonnes of fabric processing services during nine months of 2014.

The average selling price was RMB 71,300 and RMB 6,600 respectively.

Trade receivables stood at RMB 690 million as at Q3.

Its annual report says that credit period is 90 to 120 days and average trade debtors days (days it takes to collect receivables) has gradually been increasing from 54 days in 2009 to 80 days in 2013.

4. Do its existing inventories also have quality issues?

Inventories stood at RMB 107.3 million as at September 2014.

5. When is the outcome of the investigation expected?

The group CEO, Mr Lin Wen Chang and Sales and Marketing Manager Mr Cai Jinding have taken charge of the investigations and are in close discussion on the manner of resolution of the matter with customers, including one-to-one goods exchange for any product which has quality issues and discounts for affected products.

The group is confident of resolving this matter and maintaining its relationships with these customers.

At this stage, no dispute or legal action has been contemplated by the affected customers, it says.

6. How is its order book looking?

The reason to ask this question is because it already must be having outstanding orders and also an obligation to fulfil customers’ complaints who received defective products this year.

7. Can it continue to remain listed on the Singapore Exchange?

China Taisa’s stock price as at December 22 was S$0.035.

The Singapore Exchange will implement a minimum trading price (MTP) of S$0.20 for Mainboard stocks, which includes China Taisan, to remain listed.

A transition period of 12 months from the date of introduction of the MTP requirement will be provided.

Hence, our question.

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do. — Investor Central

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