20-F: Highway Holdings Returns to Profitability Amidst Sales Growth and Strategic Shifts, Faces Persistent Operational Risks

Highway Holdings Limited reported a return to net income in fiscal year 2025, driven by a 17.3% increase in net sales and improved gross margins, while actively managing geopolitical and operational challenges in its key manufacturing regions.

Summary

• Highway Holdings Limited reported net income of $106,000 for the fiscal year ended March 31, 2025, a significant improvement from net losses of $959,000 in fiscal 2024 and $294,000 in fiscal 2023.
• Net sales increased by 17.3% to $7,412,000 in fiscal 2025, up from $6,321,000 in fiscal 2024, primarily due to increased demand in Europe.
• Gross profit margin improved to 33.3% in fiscal 2025, compared to 27.0% in fiscal 2024 and 30.7% in fiscal 2023, attributed to a higher percentage of sales from customers with higher-margin products.
• Operating loss decreased substantially to $535,000 in fiscal 2025 from $1,631,000 in fiscal 2024.
• The company's cash and cash equivalents decreased to $5,972,000 as of March 31, 2025, from $6,601,000 in the prior year, largely due to cash used in operating activities and dividend payments.
• Working capital stood at $5,493,000 as of March 31, 2025, with a working capital ratio of 2.78 to 1.
• Sales to European customers increased to 85.3% of net sales in fiscal 2025, up from 66.7% in fiscal 2024, while North American sales decreased to 3.9% from 19.0%.
• The Metal Stamping and Mechanical OEM segment's net sales increased to 60.7% of total net sales in fiscal 2025, from 55.0% in fiscal 2024, due to product mix changes.
• The company successfully mitigated the risk of delisting under the HFCAA by appointing Marcum Asia CPAs LLP, a U.S.-based accounting firm, as its independent registered public accounting firm on March 7, 2025.
• Material weaknesses in internal control over financial reporting were identified as of March 31, 2025, related to insufficient skilled accounting personnel and inadequate policies/procedures, particularly in Myanmar operations.

Sentiment

Score: 7

Explanation: The company shows a positive turnaround in profitability and sales growth, and has addressed a major delisting risk. However, the persistent material weaknesses in internal controls, significant geopolitical risks in core operating regions, and high customer concentration warrant caution. The declining cash position and reliance on current reserves without credit facilities also present liquidity concerns.

Positives

• Achieved net income of $106,000 in fiscal year 2025, reversing two consecutive years of net losses.
• Net sales increased by 17.3% in fiscal year 2025, indicating a recovery in demand, especially from European customers.
• Gross profit margin improved significantly to 33.3% in fiscal year 2025, reflecting a favorable shift in product mix.
• Operating loss was substantially reduced to $535,000 in fiscal year 2025 from $1,631,000 in fiscal year 2024.
• Successfully appointed a U.S.-based accounting firm, Marcum Asia CPAs LLP, on March 7, 2025, mitigating the risk of delisting under the Holding Foreign Companies Accountable Act (HFCAA).
• Strategic relocation of labor-intensive manufacturing to Myanmar and increased automation in China are aimed at reducing costs and enhancing competitiveness.
• Development of proprietary brushless DC electric motors, with one already being manufactured and sold, indicates progress towards becoming an Original Design Manufacturer (ODM).
• Maintains a strong balance sheet with no outstanding bank loans as of March 31, 2025, and a healthy working capital ratio of 2.78 to 1, indicating adequate liquidity for the foreseeable future.
• Realized a gain of $333,000 from the disposal of an apartment in Shenzhen, China, in fiscal year 2025.
• Maintains high production quality standards, including ISO 9001 certification for both China and Myanmar factories, and ISO 14001 for the China factory.
• Has contractual provisions with certain large European customers to adjust prices every three months, mitigating currency exchange rate risks.

Negatives

• Experienced net cash used in operating activities of $360,000 in fiscal year 2025, a reversal from cash provided in prior years.
• Cash and cash equivalents decreased by $629,000 to $5,972,000 as of March 31, 2025, from $6,601,000 as of March 31, 2024.
• Working capital decreased to $5,493,000 as of March 31, 2025, from $5,809,000 in the prior year.
• Significant customer concentration, with three largest customers accounting for 88.5% of net sales in fiscal 2025, posing a risk if orders decrease or customers are lost.
• Identified material weaknesses in internal control over financial reporting as of March 31, 2025, due to insufficient skilled accounting personnel and inadequate policies/procedures, particularly in Myanmar operations.
• Dividend payments per share have decreased over the past three fiscal years, from $0.20 in FY2023 to $0.15 in FY2024 and $0.12 in FY2025.
• High inflation rates in Myanmar (26.5% in 2024) continue to increase operating costs, although partially offset by the weakening Kyat.
• Ongoing political instability and civil war in Myanmar negatively affect the employee pool and create operational uncertainties.
• Increased costs and regulatory burdens in China have adversely affected net sales and gross margins, causing some customers to seek lower-cost OEMs outside China.
• The company has no bank credit facilities, making it dependent on current financial resources for unanticipated expenses.
• High employee turnover in Myanmar due to seasonal workers and military drafting, requiring annual hiring and training of new workers.
• Incurred significant impairment losses totaling $862,000 in fiscal 2024 on property, plant, and equipment and operating lease right-of-use assets.

Risks

• The ongoing civil war in Myanmar has negatively affected, and may continue to negatively impact, operations in Myanmar, including a reduction in the potential employee pool due to military drafting.
• Changes in labor laws, environmental regulations, safety regulations, and operating costs in China, particularly Shenzhen, have significantly increased business costs and burdens, potentially impacting profitability and viability.
• Uncertainties exist regarding the interpretation and implementation of China's Data Security Law, Personal Information Protection Law, and New Overseas Listing Rules, which could lead to additional scrutiny and limit the ability to offer or list securities on U.S. exchanges.
• Political or trade controversies between China and the United States could harm operating results or depress the stock price, as the company operates in China and is listed on a U.S. exchange.
• Increased wages and other labor costs in China and Myanmar continue to negatively impact operations and profitability, potentially leading to loss of customers seeking lower-cost alternatives.
• The company may be subject to significant employee termination payment obligations in China and Myanmar, which could result in a sudden decrease in cash reserves if mass layoffs occur.
• Uncertainty regarding the renewal of Shenzhen leases in 2026 on acceptable terms, or at all, could lead to significant relocation costs and operational disruption.
• Operating in Myanmar, an underdeveloped country, exposes the company to risks such as strikes, unpredictable access to utilities, lack of infrastructure, and an antiquated banking system.
• The uncertain legal systems and inconsistent application of laws in China and Myanmar may adversely affect the company's properties and operations.
• Any interference or interruption with the 50-year lease for the Myanmar factory, or a challenge to its validity, could materially negatively affect the company's investment and operations in Myanmar.
• There is substantial uncertainty regarding the ownership of assets by foreign entities in Myanmar, and the military government could expropriate or restrict the company's substantial assets there.
• Import duties and restrictions in China and Myanmar may negatively affect operations and liquidity, with potential financial penalties for non-compliance.
• The increasing rate of inflation, particularly in Myanmar (over 26% in 2024), may negatively impact operations by increasing employee compensation and other operating expenses.
• The Chinese government exerts substantial influence over business activities and may intervene or influence operations at any time, potentially resulting in material changes to operations and stock value.
• The ability to transfer funds from China and Myanmar subsidiaries is limited by respective laws and regulations, including currency controls and withholding taxes, which could restrict funding for operations outside these countries.
• The company is financially dependent on a few major customers, with 88.5% of net sales in fiscal 2025 from three customers, posing a significant risk if one or more are lost or delay payments.
• Interruptions in supplies from third-party suppliers, due to events like war (Ukraine), health epidemics, or market shortages, could adversely affect business and result in lost sales and increased costs.
• Fluctuating shipping costs and disruptions in shipping could materially and adversely affect business and operating results, potentially causing customers to seek local suppliers.
• Transactions between the company and its subsidiaries may be subject to scrutiny by tax authorities regarding transfer pricing, potentially leading to increased tax liabilities and penalties.
• The company is highly dependent upon its Chief Executive Officer, Roland Kohl, and other key managers; the loss of their services could have a material adverse effect on business and customer relationships.
• The company faces significant competition from numerous larger, better-capitalized, and international competitors with potentially lower cost structures and greater resources.
• Material weaknesses in internal control over financial reporting, specifically insufficient skilled accounting personnel and inadequate policies/procedures, could adversely affect the ability to accurately and timely report financial results or prevent fraud.
• Fluctuations in foreign currency exchange rates (USD, HKD, RMB, Euro, MMK) will continue to affect operations and profitability, as the company does not hedge these risks.
• International operations expose the company to significant worldwide political, economic, and legal risks, including changes in customs regulations, tariffs, trade restrictions, and civil unrest.
• Acquisitions or strategic investments, if pursued, may not be successful and could harm operating results due to unknown liabilities, integration difficulties, and cash depletion.
• Health epidemics and natural disasters affecting China and Myanmar could materially and adversely affect business operations, including server interruptions and employee availability.
• Incorporation in the British Virgin Islands means shareholder rights are not as clearly established as in U.S. jurisdictions, potentially making it harder to protect interests.
• The company's shareholder rights plan and certain provisions of its Amended and Restated Memorandum and Articles of Association may discourage a change of control, limiting shareholders' ability to obtain a premium for their shares.
• It may be difficult to serve the company with legal process or enforce judgments against management or the company, as substantially all assets, officers, and directors are located outside the U.S.
• The market price of the company's shares is subject to volatility due to various factors, including operating results, news announcements, and geopolitical tensions.

Future Outlook

The company's future growth and profitability are dependent on its ability to compete as a third-party contract manufacturer. The business strategy focuses on expanding as an integrated OEM manufacturer of complex metal, plastic, and electronic products for blue-chip international customers. This involves leveraging multi-disciplinary manufacturing strengths, cost structure, logistical advantages, and reputation for quality. Key elements include increasing production efficiency through automation in China, relocating labor-intensive activities to Myanmar to reduce costs and benefit from preferential customs provisions, and developing proprietary products like brushless DC electric motors to transition towards an Original Design Manufacturer (ODM model.

Management Comments

• "We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs."
• "While we do not believe that, as of the date of this annual report, our operations in Hong Kong or China are subject to the review or prior approval of the Cyberspace Administration of China (the CAC) or the China Securities Regulatory Commission (the CSRC), we face various legal and operational risks and uncertainties associated with being based in or having operations in the PRC, having clients who are PRC companies, and the complex and evolving PRC laws and regulations."
• "While the Company is trying to offset the increasing costs and burdens of doing business in China (primarily by increasing automation and moving labor-intensive activities to Myanmar), no assurance can be given that in the longer term the Company will be able to continue to operate in China and/or remain viable under the new and evolving business or regulatory conditions in China."
• "Our management monitors the cash position of each of our operating entities within our organization regularly to ensure each entity has the necessary funds to fulfill its obligation for the foreseeable future and to ensure adequate liquidity."
• "The Company believes that its currently available working capital and funds generated from its operations are adequate to support its operations for at least the next 12 months."
• "Management believes that maintaining close relations with the Companys customers is important to the success of the Companys business."
• "The Companys goal is to develop its own proprietary electric motors that will enable it to transition a portion of its operations from being an OEM to becoming an ODM, or original design manufacturer, that designs, develops, manufactures, and sells its own products."

Industry Context

The company operates within the third-party contract manufacturing industry, which has seen a global trend of manufacturers outsourcing component and product requirements to independent manufacturers. This outsourcing is driven by benefits such as access to lower labor and overhead costs, reduced time to market, and improved product quality. While the company initially gained a cost advantage by operating in Shenzhen, China, it now faces increased competition and rising costs in the region. In response, the company has adopted a strategy of increasing automation in China and shifting labor-intensive operations to Myanmar to maintain competitiveness against other OEMs, including larger international players and those in other low-cost manufacturing countries.

Comparison to Industry Standards

• The company competes with numerous OEMs, including smaller local companies and large international companies such as FoxConn, which also operates a major manufacturing facility in Long Hua, Shenzhen.
• Many competitors have achieved substantial market share and often possess lower cost structures and greater manufacturing, financial, or other resources than the company.
• The company differentiates itself as a vertically integrated, multi-disciplinary manufacturer capable of designing, manufacturing, and assembling complex components and subassemblies, combining metal stamping, electronics, and plastics manufacturing.
• The company conducts most of its manufacturing operations in accordance with 'typical German manufacturing standards,' emphasizing cleanliness, incoming material control, in-process quality control, finished goods quality control, and final quality audit.
• The company's factories in both China and Myanmar have received and maintained ISO 9001 quality management system certification, and the China factory also holds ISO 14001 environmental management systems certification.
• The company's Myanmar operations benefit from preferential customs provisions, particularly for European and U.S. customers, due to Myanmar's designation as an undeveloped country by the European Commission, which offers tariff concessions.

Management Changes

Corporate Governance

Legal Proceedings

• Not currently subject to any pending legal proceedings that involve amounts material to the company's financial condition.

Related Party Transactions

• No material related party transactions were engaged in during the fiscal year ended March 31, 2025.
• The 50-year lease for the Myanmar factory (Kayser Myanmar) is with Konig Company Limited, which is owned by two Myanmar citizens, one of whom is a manager and 16% shareholder of Kayser Myanmar. While the company does not believe Konig Company is a related party, this relationship exists.

Stakeholder Impact

• Shareholders: Experienced a return to net income and sales growth, but face risks from declining cash, geopolitical instability, customer concentration, and internal control weaknesses. Corporate governance provisions may limit their ability to influence control changes.
• Employees: Face risks from labor shortages and high turnover in Myanmar due to military drafting and seasonal work. Increased labor costs in China and potential significant severance payments upon workforce reductions are also concerns. Management has approved the termination of the CEO's salary reduction.
• Customers: Benefit from the company's high-quality products, competitive pricing, and reliable delivery, as well as its vertically integrated manufacturing capabilities. However, they may be impacted by supply chain disruptions, fluctuating shipping costs, and geopolitical tensions affecting sourcing from China/Myanmar.
• Suppliers: Subject to increased regulation and monitoring of raw material imports in China, with potential for financial penalties if import regulations are not met.
• Creditors: The company has no outstanding bank loans and reports adequate working capital, but declining cash and reliance on current reserves for unanticipated expenses could be a concern.

Next Steps

• Continue to upgrade Myanmar finance department staff through additional training and more frequent in-person reviews from Hong Kong employees knowledgeable about U.S. GAAP.
• Hire additional staff and/or outside consultants experienced in U.S. GAAP financial reporting and SEC reporting requirements if necessary.
• Implement more robust financial reporting and management controls over accounting and financial reporting functions across all facilities.
• Reapply for Nissin PRC's principal operating license in 2031.
• Hold the next annual meeting of shareholders on September 12, 2025, where one class of directors will be elected for a three-year term.
• Evaluate the impact of ASU 2023-09 (Income Taxes) for adoption in fiscal years beginning after December 15, 2024.
• Evaluate the impact of ASU 2024-03 (Expense Disaggregation) for adoption in fiscal years beginning after December 15, 2026.
• Continue to develop proprietary brushless DC electric motors, with two more motors still in design and testing phases, to transition towards an ODM model.
• Explore other possible means of leveraging manufacturing capabilities in China and developing proprietary products.

Key Dates

Recommendation

Keywords

SEC filing, 20-F, manufacturing, OEM, metal stamping, plastic injection molding, electronic assembly, China, Myanmar, Hong Kong, financial results, corporate governance, risk management, supply chain, international operations, internal controls, dividends, NASDAQ, HIHO, foreign private issuer, cybersecurity, labor costs, inflation, trade relations, restricted stock, automation, proprietary products, brushless DC motors