Analysis of Heineken Malaysia Berhad's financial statements for the period from 2016 to

2017

This report analyzes the balance sheets and income statements of Heineken Malaysia Berhad.
Trends for the major balance sheet and income statement items and ratio analysis are used to
understand the financial position and financial effectiveness of the company. The report studied
the 2016 - 2017 period.

1. The Common-Size Analysis of the Assets, Liabilities and Shareholders' Equity

Table 1. Assets Trend Analysis, in thousand MYR

Absolute
Percentage
Indicators 2016 2017 change,
change, %
+/-

Property, plant and equipment 198236 220330 22094 11.15

Intangible assets, net (excluding goodwill) 33505 23235 -10270 -30.65

Investments in subsidiaries, joint ventures

14344 14344 0 0
and associates

Trade and other noncurrent receivables 1050 905 -145 -13.81

NONCURRENT ASSETS (TOTAL) 247135 258814 11679 4.73

Current inventories 30210 31823 1613 5.34

Trade and other current receivables 131607 60096 -71511 -54.34

Current tax assets, current 11636 19926 8290 71.24

Cash and cash equivalents 3995 11205 7210 180.48

CURRENT ASSETS (TOTAL) 177448 123050 -54398 -30.66

ASSETS (TOTAL) 424583 381864 -42719 -10.06

It can be noticed from Table 1 that there was a tendency to decrease in the total value of the
assets. The percentage change was equal 10.06% in 2017. The value of the assets totalled MYR
381,864 thousand at the end of 2017.

The overall decrease of the assets reflects a reduction in the current assets by 30.66%, while the
value of the noncurrent assets increased by 4.73%.
The change of the noncurrent assets value in 2016-2017 was connected with the growth of the
following assets:

- Property, plant and equipment (11.15%)

The change of the current assets value in 2016-2017 was connected with a negative change of the
following assets:

- Trade and other current receivables (-54.34%)

Table 2. Sources of Finance (Equity and Liabilities) Trend Analysis, in thousand MYR

Absolute
Percentage
Indicators 2016 2017 change,
change, %
+/-

Issued (share) capital 151049 151049 0 0

Retained earnings 106372 19338 -87034 -81.82

EQUITY (TOTAL) 257421 170387 -87034 -33.81

Deferred tax liabilities 38481 29475 -9006 -23.4

NONCURRENT LIABILITIES 38481 29475 -9006 -23.4

Current borrowings 74000 101000 27000 36.49

Trade and other current payables 54681 81002 26321 48.14

CURRENT LIABILITIES 128681 182002 53321 41.44

LIABILITIES (TOTAL) 167162 211477 44315 26.51

LIABILITIES AND EQUITY (TOTAL) 424583 381864 -42719 -10.06

Similar to the value of total assets, the liabilities and equity value amounted to MYR 381,864
thousand in 2017, 10.06% less than in 2016.

There was a stable decline in the stockholders' equity value in 2016-2017, which indicates that
the company's assets would worth less after all claims upon those assets were paid. This means
that Heineken Malaysia Berhad was degrading period by period.

The change of the stockholders' equity value in 2016-2017 was related to the decline of the
following sources:

- Retained earnings (-81.82%)

The change of the liabilities value in 2016-2017 was related to growth of the following sources:

- Current borrowings (36.49%)

- Trade and other current payables (48.14%)

Table 3. Assets Structure Analysis, %

Absolute
Indicators 2016 2017 change,
+/-

Property, plant and equipment 46.69 57.7 11.01

Intangible assets other than goodwill 7.89 6.08 -1.81

Investments in subsidiaries, joint ventures and associates 3.38 3.76 0.38

Accounts receivable, net, noncurrent 0.25 0.24 -0.01

NONCURRENT ASSETS (TOTAL) 58.21 67.78 9.57

Current inventories 7.12 8.33 1.22

Trade and other current receivables 31 15.74 -15.26

Current tax assets, current 2.74 5.22 2.48

Cash and cash equivalents 0.94 2.93 1.99

CURRENT ASSETS (TOTAL) 41.79 32.22 -9.57

ASSETS (TOTAL) 100 100 0

At the end of 2016 the assets consisted of: 58.21% noncurrent assets and 41.79% current assets.
The most significant items of the current assets were: current inventories (7.12% of total assets),
trade and other current receivables (31% of total assets), etc. The following noncurrent assets had
the highest values: property, plant and equipment (46.69% of total assets), intangible assets other
than goodwill (7.89% of total assets), investments in subsidiaries, joint ventures and associates
(3.38% of total assets), while the other items did not play a significant role.

Over the period under review the assets structure changed. At the end of 2017 the assets
consisted of: 67.78% noncurrent assets and 32.22% current assets. Total current assets composed
mostly of: current inventories (8.33% of total assets), trade and other current receivables (15.74%
of total assets), current tax assets, current (5.22% of total assets), etc. The most significant items
of the noncurrent assets were: property, plant and equipment (57.7% of total assets), intangible
assets other than goodwill (6.08% of total assets), investments in subsidiaries, joint ventures and
associates (3.76% of total assets), etc.

Table 4. Equity and Liabilities Structure Analysis, %

Absolute
Indicators 2016 2017 change,
+/-

Issued (share) capital 35.58 39.56 3.98

Retained earnings 25.05 5.06 -19.99

EQUITY (TOTAL) 60.63 44.62 -16.01

Deferred tax liabilities 9.06 7.72 -1.34

NONCURRENT LIABILITIES 9.06 7.72 -1.34

Current borrowings 17.43 26.45 9.02

Trade and other current payables 12.88 21.21 8.33

CURRENT LIABILITIES 30.31 47.66 17.35

Liabilities 39.37 55.38 16.01

LIABILITIES AND EQUITY (TOTAL) 100 100 0

By looking at the Table 4 it can be noticed that the sources of finance consisted of 60.63%
shareholders' equity, 9.06% noncurrent liabilities and 30.31% current liabilities. High share of
the equity in 2016 decreases the risk that the firm will not be able to pay interest and repay the
principal on the amount borrowed. The total equity consisted mostly of: common stock (MYR
151,049 thousand), retained earnings (MYR 106,372 thousand), etc. The company's liabilities
included deferred tax liabilities (9.06% of the total sources of finance), current borrowings
(17.43% of the total sources of finance), trade and other current payables (12.88% of the total
sources of finance), etc.
At the end of 2017 the sources of finance comprised 44.62% shareholders' equity, 7.72%
noncurrent liabilities and 47.66% current liabilities. This shows that the share of the equity was
in the area of critical values, meaning that the financial risk level was average. The total equity
consisted mostly of: common stock (MYR 151,049 thousand), retained earnings (MYR 19,338
thousand), etc. The following liabilities had the highest values: deferred tax liabilities (7.72% of
the total sources of finance), current borrowings (26.45% of the total sources of finance), trade
and other current payables (21.21% of the total sources of finance), etc.

2. Financial Sustainability and Long-Term Debt-Paying Ability

Table 5. Key ratios of the company's financial sustainability

Absolute
Indicators 2016 2017 change,
+/-

Times Interest Earned 100.47 51.76 -48.71

Debt Ratio 0.39 0.55 0.16

Long-Term Debt Ratio 0.09 0.08 -0.01

The Long-Term Debt to Total Capitalization Ratio 0.2 0.16 -0.04

Debt/Equity Ratio 0.65 1.24 0.59

Debt to Tangible Net Worth Ratio 0.75 1.44 0.69

Long-Term Debt to Equity 0.25 0.2 -0.06

The times interest earned ratio indicates that Heineken Malaysia Berhad had no difficulty
generating enough cash flow to pay interest on its debt at the end of 2017. Company's ability to
pay interest on debt was worse in 2017 comparing to 2016.

The debt ratio tells us that in 2016 each MYR 1.00 of the assets was financed by MYR 0.39 of
debt (and MYR 0.61 of equity). For every MYR 1.00 of the assets there were MYR 0.55 of
liabilities at the end of 2017. The debt ratio lies in the area of critical values (from 0.4 to 0.6) at
the end of the period, meaning that there was an acceptable financial and credit risk. A decrease
in the long-term debt ratio suggests that the company was progressively becoming less
dependent on debt to grow a business. 8% of the sources of finance were a long-term debt at the
end of 2017.

The value of the long-term debt to total capitalization ratio was 0.2 in 2016 and 0.16 in 2017.
Total capitalization consists of the long-term debt, preferred stock, and common stockholders'
equity. Lower ratio shows lower risk.

The debt/equity ratio is another computation that determines the entity's long-term debt-paying
ability. At the end of 2017 this ratio was 124%, meaning that creditors were protected in case of
insolvency.

The debt to tangible net worth ratio is a more conservative ratio than the debt/equity ratio. It
eliminates intangible assets because they do not provide resources to pay creditors. The table 5
shows that the ratio changed from 0.75 in 2016 to 1.44 in 2017. This shows that the creditors'
protection was getting worse. The value of the long-term debt to equity ratio was 0.25 in 2016
and 0.2 in 2017.

3. Liquidity of Short-Term Assets

Table 6. Liquidity Ratios

Absolute
Indicators 2016 2017 change,
+/-
Current Ratio 1.38 0.68 -0.7

Quick Ratio (Acid Test Ratio) 1.05 0.39 -0.66

Cash Ratio 0.03 0.06 0.03

Net Working Capital 48767 -58952 -107719

Sales to Net Working Capital - -247.4 -

The current ratio was 1.38 in 2016, meaning that Heineken Malaysia Berhad had 1.38 times as
many current assets as current liabilities. The value of the ratio lies below the area of critical
values. The current ratio was 0.68 at the end of 2017. The value of the ratio was unacceptable at
the end of the period under review. This means that Heineken Malaysia Berhad had problems
with paying its suppliers and creditors in due time.

The quick ratio for 2016 was 1.05, showing there were MYR 1.05 of the quick assets for every
MYR 1.00 of the current liabilities. The ratio for period 2017 from Table 6 shows MYR 0.39 of
the quick assets were available for every MYR 1.00 of the current liabilities. The decrease in the
quick ratio from 2016 to 2017 indicates that the company has been losing its ability to pay its
short-term debt.

The company's quick liquidity was unsatisfactory at the end of the period.

The cash ratio shows that the company was able to pay off 6.16% of its debt immediately as for
the end of 2017. It indicates an immediate problem with paying bills.

Table 6 presents the working capital for Heineken Malaysia Berhad at the end of 2016-2017.
Heineken Malaysia Berhad had MYR 48,767 thousand in the working capital in 2016 and MYR
-58,952 thousand in the working capital in 2017.

Overall, the working capital value had dropped over 2016-2017.

The working capital value was negative at the end of the period under review, meaning low
flexibility, since noncurrent assets may not be modified easily as the sales volume changes.

The sales to working capital ratio was -247.4 in 2017.

4. Overview of the Financial Results

Table 7. Financial Results Trend Analysis, in thousand MYR

Absolute Percentage
Indicators 2016 2017
change, change, %
 +/-

Revenue 1846919 1259874 -587045 -31.79

Cost of sales 1708742 1196621 -512121 -29.97

Gross profit 138177 63253 -74924 -54.22

Other income and expenses from

continuing operations, except interest and 342473 158985 -183488 -53.58
debt expense and income tax expense

EBIT 480650 222238 -258412 -53.76

Finance costs 4784 4294 -490 -10.24

Income tax expense (benefit) 20536 2880 -17656 -85.98

Income (loss) from continuing operations 455330 215064 -240266 -52.77

Comprehensive income (loss) 455330 215064 -240266 -52.77

The comparative income statement given above shows that there has been a decrease in the net
sales of 31.79% over the reported period. The cost of goods and services totalled MYR
1,196,621 thousand in 2017, 29.97% less than in 2016. This has resulted in a decrease in the
gross profit by 54.22%. EBIT was positive at MYR 222,238 thousand in 2017. The EBIT decline
was 54% during 2016-2017. On the whole, 2017 was a good period as the company recorded
MYR 215,064 thousand comprehensive income.
The chart above shows that the gross profit to net sales ratio decreased in 2017 by 2.46%
comparing to 2016. This decline of the gross profit to net sales ratio over the period of 2016-
2017 indicates that the company was becoming less efficient with the manufacturing or
distribution process, and costs of goods sold increased the negative influence to the gross profit.
2017 also witnessed the decrease of the company's EBIT to sales ratio comparing to 2016. The
dynamics of the EBIT to sales ratio over the period of 2016-2017 demonstrate the company's
declining earning ability and its cost management became worse. Share of the comprehensive
income in the company's net sales decreased in 2017 by 7.58% comparing to 2016. This should
notify the company's management about the negative trend of its profitability indicators.

5. Profitability Ratios

Table 8. Profitability Ratios, %

Absolute
Indicators 2016 2017 change,
+/-

Net Profit Margin 24.65 17.07 -7.58

Operating Income Margin 25.87 17.56 -8.31

Gross Profit Margin 7.48 5.02 -2.46

Return on Assets - 53.34 -

Return on Operating Assets - 59 -

Return on Investment - 88.49 -

- 100.54 -
Return on Equity after Tax

By looking at the Table 8. 'Profitability Ratios' it can be seen that the net profit margin was
positive in 2016-2017. This amount dropped to 0.17 (17.07%) in 2017.

The declining trend of the net profit margin over the period of 2016-2017 indicates that the firm
was deteriorating its ability to earn the net profit of its sales, facing the decrease of the amount of
the net profit generated by a ringgit of sales from period to period.

The Heineken Malaysia Berhad's operating performance was robust in 2017. For every ringgit of
the net sales the company earned MYR 0.18 in the operating income.The dynamics of the
operating income margin over the period of 2016-2017 were negative, reflecting the decline of
the operating income amount generated by a ringgit of sales.

Gross profit margin shows that the company earned MYR 0.05 of the gross profit per ringgit of
sales in 2017. Cost of goods sold increased much more than sales, resulting in a lower gross
margin in 2017 comparing to 2016.

The decrease of the gross profit margin in 2017 comparing to 2016 indicated the decline of the
gross profit amount, earned per ringgit of sales.

For Heineken Malaysia Berhad the ROA shows that the company was earning a profit of about
53.34 cents per ringgit of the asset value in 2017.

The operating assets were yielding a 59% return in 2017.

Higher ROIs suggest better performance. ROI was 88.49% in 2017.

The ROE shows that the company went to a profit of about 100.54 cents per ringgit in 2017. The
ROE represents the increase in the value of the stockholders' wealth.

Table 9. Dupont Analysis

Indicators 2017
Return on Assets 53.34

Net Profit Margin 17.07

Total Asset Turnover 3.12

For 2017 the return on assets equals 53.34, meaning that the net income generated by 1 ringgit of
the assets amounted to MYR 0.53 in 2017. At the same time, company's net profit margin was
17.07 showing that the company was earning MYR 0.17 of the net income per each ringgit of
sales. Heineken Malaysia Berhad's total asset turnover of 3.12 means that the company was
turning its assets over 3.12 times per period.

6. Activity Ratios (Turnover Ratios)

Table 10. Activity Ratios (Turnover Ratios)

Indicators 2017

Asset Turnover 3.12

Sales to Fixed Assets 6.02

Current Asset Turnover 8.39

Working Capital Turnover -247.4

Accounts Receivable Turnover (Times) 13.14

Average Collection Period (Accounts Receivable Turnover in

27.39
Days)

Accounts Payable Turnover (Times) 17.64

Days Payable Outstanding 20.41

Inventory Turnover (Times) 38.58

Inventory Turnover in Days 9.33

Cash Turnover 165.77

Operating Cycle 36.72

Cash Conversion Cycle 16.31

By looking at the Table 10 it can be seen that the company produced MYR 3.12 of products and
services for every ringgit of the assets used at the end of the period. The net sales of the
enterprise decreased in 2017, causing lower total asset turnover ratio. The decline of the total
assets value had an opposite effect.

The fixed assets turned over 6.02 times in 2017. Within one period, on average, the current assets
were turned over at least 8 times. it can be seen that the working capital turnover was -247.4 in
2017. The 2017 accounts receivable turnover of 13.14 indicates Heineken Malaysia Berhad
collected its average receivables 13.14 times that period. The higher the turnover is, the faster the
collection process. This means that it took an average of 27.39 days to collect a receivable in
2017. The accounts payable turned over 17.64 times in 2017. The turnover period of the accounts
payable was 20.41 days. By comparing the turnover data of the accounts receivable and accounts
payable during 2017 it can be seen the accounts receivable were turned over slower than the
accounts payable.

Heineken Malaysia Berhad's inventory did 38.58 turns in 2017.The company was holding the
inventory for 9.33 day(s). The cash turnover ratio was 165.77 in 2017.

The operating cycle was 36.72 in 2017. Shorter operating cycle indicates better performance.
The cash conversion cycle shows how long does it take a company to convert the resource inputs
into cash flows. According to the data it can be seen that the cash conversion cycle was 16.31
days long in 2017.

OTHER INDICATORS

7. Investor Analysis

Table 11. Investor Analysis

Absolute
Indicators 2016 2017 change,
+/-

Net assets (Net worth), in thousand MYR 257421 170387 -87034

Degree of Financial Leverage 1.01 1.02 0.01

The net value of the enterprise's assets was MYR 170,387 thousand at the end of 2017, about
MYR 87,034 thousand less than declared at the end of 2016. This means that Heineken Malaysia
Berhad was degrading period by period.

If earnings before interest increase, the financial leverage will be favourable. The degree of
financial leverage was 1.02 in 2017. This means that any change in the EBIT will be
accompanied by 1.02 times that change in the net income. This is a low degree of financial
leverage.
8. Forecasting Financial Failure (Bankruptcy Test) (Financial Distress Prediction)

Table 12. The Z-Score Model for Private Firms

2016 2017
Indicators
0.11 -0.15
X1 (Working Capital/Total Assets)
0.25 0.05
X2 (Retained Earnings /Total Assets)
1.13 0.58
X3 (Earnings Before Interest and Taxes/Total Assets)
1.54 0.81
X4 (Market Value of Equity/Book Value of Total Debt)
4.35 3.3
X5 (Sales/Total Assets)
8.8 5.37
Z=

The Altman Z-score for 2016 shows that the company had a good financial position. At the end
of 2017 the Altman Z-score was 5.37 that indicates the company had a relatively high degree of
protection against bankruptcy. The decrease of the company's Z-Score value over the period of
2016-2017 showed that Heineken Malaysia Berhad has been deteriorating its financial condition
and increasing the risk of bankruptcy. It also witnessed that the company performed well enough
to keep its Z-Score value within the safe zone.

9. Financial Rating

A rating helps to sum up the current financial position and future expectations with one word.

Table 13. Financial Rating

Indicators Weighting factor Score Weighted

average score

1 2 3 4=3*2

Net Profit Margin 0,15 1 0.15

Return on Assets 0,15 1 0.15

Debt/Equity Ratio 0,15 -1 -0.15

Current Ratio 0,1 -1 -0.1

Net Sales Change 0,1 -1 -0.1

Operating Income Margin 0,1 1 0.1

Equity Change 0,1 -1 -0.1

Quick Ratio 0,05 -1 -0.05

Debt Ratio 0,05 0.5 0.025

Times Interest Earned 0,05 1 0.05

Total Score 1 - -0.025

Table 14. Financial condition scale

Score from to Sign Current financial

(inclusive) condition

1 0,8 AAA Excellent

0,8 0,6 AA Very good

0,6 0,4 A Good

0,4 0,2 BBB Positive

0,2 0 BB Normal

0 -0,2 B Satisfactory

-0,2 -0,4 CCC Unsatisfactory

-0,4 -0,6 CC Adverse

-0,6 -0,8 C Bad

-0,8 -1 D Critical

As a result we can confirm a satisfactory (B) financial situation.

 Conclusion

By assessing the financial position of Heineken Malaysia Berhad the following can be concluded:

- Heineken Malaysia Berhad's financial sustainability ratios indicate good financial health at the
end of 2017. This company was able to generate enough cash flow to pay interest on its debt
while the debt ratio laid in the area of critical values (from 0.4 to 0.6).

- There is a serious concern about company's liquidity. This is why it must urgently start looking
for the additional resources to be able to improve its liquidity. The company was not able to pay
its suppliers and creditors in due time.

- The positive profitability provides the evidence of a good work during 2017. The ROA shows
that the company was earning a profit of about 53.34 cents per ringgit of the asset value. The
high return on equity after tax shows the shareholders' wealth growth.

- Comparing the turnover data of the accounts receivable and accounts payable during 2017 it
can be seen that the accounts receivable were turned over slower than the accounts payable.

- The net value of the enterprise's assets was MYR 170,387 thousand at the end of 2017, about
MYR 87,034 thousand less than declared at the end of 2016. This means that Heineken Malaysia
Berhad was degrading period by period.

- At the end of 2017 the Altman Z-score was 5.37 indicating that the company had a relatively
high degree of protection against bankruptcy.

- The overall financial position of the company was satisfactory (B).