Kaiwai Motorcycles
Kaiwai Motorcycles was founded in Taipei in 1965. The company’s headquarters is in Hsinchu
County, Taiwan, and it sells scooters under the brand name Kaito. Their major production
bases are Taiwan, China, and Vietnam.
On December 31, 2022, the general cargo ship Yi Cheng
1 crashed into a small island between Taiwan and the
Philippines (Vohas Island). This ship was anchored during
adverse weather but broke its moorings and drifted into an
island cropping. All 13 crew onboard managed to escape
and were evacuated by helicopter to Basco, but the ship and
cargo were lost.
Kaiwai announced in a hastily arranged conference call in early January that revenues and
earnings would be lower than previously anticipated for 2022. Their January 5th guidance was
that 2022 earnings would be $2 to $3 million less than expected due to the sinking of Yi Cheng
1.
A major shipment of motorcycles for the Philippine market had left their Quanzhou facilities
on the ship, and all of them were lost at sea. They had insurance on the motorcycles, which
covered their manufacturing costs. The new Kaiwai earnings guidance noted that the revenue
associated with this shipment was $2 to $4 million. They had lost all 15 of their 40-ft shipping
containers on the Yi Ching 1.
Kaiwai noted that they typically recognized product sales revenue when they shipped the
product to distributors in different countries. They also charged reserves at this time due to
potential safety recalls and dealer rebates. The CFO of the firm, Li Wei Tan, during the Q&A
period of the conference call, responded that the distributor in the Philippines had taken title
of the motorcycles when they left the shipping dock. Specifically, Mr. Tan noted they had sent
the bikes free-on-Board (FOB) origin. “FOB origin” indicates that the buyer takes responsibility
for the goods when the goods leave the factory. In contrast, FOB destination denotes that the
seller remains responsible for the goods until the buyer takes possession at their location. Most
of the sell-side analysts who covered Kaiwai remained relatively upbeat about the firm, noting
that this was a one-time accident.
Aaron Lim, a newly hired buy-side analyst at Merlion Partners, who had just recently finished
his master’s degree at NUS, was a bit more concerned. Perhaps it was because his firm operated
on the buy-side. Yet, he still did not understand why these sell-side analysts were all so
nonchalant about the accident and its impact on 2022 revenue.
Aaron had several questions or issues he wanted his team to
tackle. First, he wondered how many motorcycles could fit into a
standard shipping container. He discovered the firm used
containers packed with two tiers of racking typically held 40 to 50
units depending on bike size. With their range of 200cc, 400cc,
and 600cc motor scooters, their bikes had a range of Open
Market Values (OMVs) from $2,200 to $4,800 to $7,800. This
OMV price is essentially the price paid by the distributor for the
bike without any dealer rebates. Did it make sense that they could
lose so much revenue with just 15 containers?
Second, how did this hurt the 2022 numbers? He knew the company opted to report under
IFRS due to its desire to attract a global investor pool. The motor scooters had just left the
factory in Quanzhou. Aaron wondered how the accounting standards under IFRS on revenue
recognition treated this issue.
Finally, Aaron wondered about the manufacturing insurance that Kaiwai had on the
motorcycles worked. Under FOB origin, Aaron thought the title and responsibility of the
motorcycles transferred from Kaiwai to the distributor. How did they have insurance on
something in the inventory of the Philippines distributor? Alternatively, would the insurance
seem more likely if it was FOB destination?
The task of Aaron’s team is to produce a short PowerPoint presentation for their customers on
Kaiwai’s 2022 new revenue guidance after the sinking of Yi Cheng 1. With a slide deck of 6 or
fewer slides, this guidance should describe the major issues in the evaluation, give a specific
recommendation about investing in Kaiwai, and the rationale for this guidance. The equity
research firm could call on them to share their presentation with an investor group.