Flyke International was principally engaged in the design, production and sale of footwear, apparel and accessories. It listed in March 2010, raising RMB320m despite generating free cash inflows and a strong balance sheet with net debt to equity of just 12%. In FY11, the company generated 35% of its sales from Flyke footwear, 38% from Flyke apparel, 24% from its export ODM business while shoe soles accounted for 3%. It had 2,160 stores by the end of that year. Flyke produced all of its footwear in-house from 12 production lines while apparel was outsourced.
Trouble started when the company issued a profit warning in March 2013 relating to financial performance in 2H12, and a further warning in July which saw the company report a loss in 1H13. In March 2014, the company ordered the suspension of its shares following Shinewing’s inability to complete its audit given inconsistent information provided by the company regarding its suppliers. Shinewing went on to resign in January 2015 following a disagreement over fees. A limited forensic report was issued in January 2015 although there had been difficulty in getting hold of the relevant documents owing to a high turnover of staff.
Flyke triggered a full four points under our Fake Cash Flow model in FY11, owing to high operating margins (around 18%), large quantities of non-production assets (receivables and cash), low dividends (<20%) and a reliance on short-term debt.
Flyke International:Annual Report , 14 Apr 2011
Forensic Investigation, 28 Jan 2015
Resignation of Auditor, 12 Jan 2015
Profit Warning, 08 Feb 2013