Valuetronics Holding - One of my favourite counter

Valuetronics Holding

This is one of my favourite stock, in fact the major reason that I love this counter so much is I generated my first five digit profit from it last year! My broker introduced this counter to me in 2014 together with 800Super (and they are the only two counters introduced by him). Valuetronics is my biggest regret too. I first traded this company in 2014 and earned around 2k, and I put 100% of my available cash into this counter at 37 cents and 40 cents last year and sold them away at around 44.5 cents. If we use the numbers from its 2016 annual report, the diluted earning per share was 31.7 HK cents, which is equivalent to 5.5 SGD cents (using the fx rate on 8 July 2016 from XE.com), I bought it at around PE 7 and sold it at around PE 8.... and the dividend yield at the price I sold is around 7.8%.. ouch. I always want to buy back but now it is trading near historical high.. Is it still worth to buy? This time I will study its annual reports carefully.

Recently OCBC came up with an unrated report for Valuetronics, the link is stated as below:

http://research.sginvestors.io/2017/06/valuetronics-holdings-ltd-ocbc-investment-2017-06-27.html

Business Review

Valuetronics was established in 1992 and HQ in Hong Kong, it is an integrated EMS provider with two core business segments: Consumer Electronics (CE) and Industrial and Commerce Electronics. Valuetronics offers a broad combination of design, engineering, manufacturing, and supply chain support services to meet the needs of their clients. The company used to have licensing business which was acquired in 2010, however it was terminated on 7 August 2012 after a rigorous review. I found that the company is still transforming itself since then. As stated in 2015 annual report, the board found that the customers in CE segment will continue their aggressive pricing strategies for mass market products, which will drag down the overall financial performance, the board decided to reduce their reliance on LED lighting products and pursue new product lines in the CE segment. Following the exit of traditional mass market LED light bulbs in FY2016, the group has refined the CE segment's product portfolio to include smart lighting products with IOT features. For the ICE segment, the company also acquired its first automobile customer in FY2016, and started supplying in-car connectivity modules to one of their automaker customer. In FY2017 result media release, the board is confident that Valuetronics will ride on the opportunities presented by the confluence of technology under the emergent IOT trend in order to expand its product portfolio.  Lets take a look at the revenue generated from each segment:

CE used to be its major source of revenue, however as all the other mass product markets, the customers will demand to buy more and pay less (it used to have a higher profit margin). So the board turned their focus into their ICE segment which will provide higher profit margin. As a result the revenue from CE segment created a 'mushroom top' and bounce back in 2017 when the company includes smart lighting products into the product line, and revenue from ICE segment enjoyed a four consecutive double digital growth from 2014 to 2017. The change of product mix increased the gross profit margin over years as shown in the graph below:

Balance Sheet and Performance Review

I like debt free companies with stable dividends. Valuetronics is debt free company with huge cash holding. As stated in annual report 2016, the company approached an investment banked to ask for advice on cash management. The company plans to keep the cash for any merger or acquisition opportunity that may arise. I plot a chart of its cash reserves from 2010 to 2017:

From the chart we can see that the company has cash inflow almost every year since 2011 even though they are paying very attractive dividend every year. As their performance is good, the strategy of keeping the cash and wait for any merger or acquisition opportunity should be fine. However, if the company's performance is not impressive anymore due to any reason, I hope that the board will utilize this large cash reserve wisely. 

The company is generating its revenue from many different countries. The diversity will prevent the company's performance drag down significantly by any major economic changes or forex changes in any country. However during FY2016 more than 50% of the total revenue was generated from three major customers, hope the company can win more orders from other customers too. The geographical information is shown as below:

However, as the company is presenting its financial performance and position in HKD, I will look at the FX rate to convert HKD back to SGD, so later we are able to calculate the EPS and NAV in SGD to compare them with the share price. 

Take note that the HKD is devaluing since late 2016, which will make the company and its dividend a bit less attractive when we convert them into SGD. We also know that HKD is linked to USD, so we have to monitor USD/SGD exchange rate, as more than 50% of the company's revenue is received in US dollars too. 

Current valuation

After the 1 for 10 bonus issued recently, the stock is currently trading at around 80 cents. Is it still a value buy? Let us take a look, the calculations are based on total number of shares (422,155,117) and the HKD/SGD FX rate is 5.65357:

	HKD	SGD
Cash and cash equivalents per share	178.36	31.55
Net current asset per share	173.86	30.75
NTA per share	222.32	39.32
EPS	36.5	6.46

So the share is currently trading at PE 12.38 and PB 2.034, and current dividend yield is around 4.42%. This is not so attractive to me. Perhaps I shall wait for a better entry price? 

Conclusion

I can see that the management team is quite active and trying to transform the business in order to ride on the latest tech trend. However, I believe that it wont be easy. There are many other companies in this industry are trying to catch this trend too. What I like about the management team is they are able to give up their mass LED market which used to be its major revenue source, and retrain the employees for more sophisticated products with higher margin and brighter future. In 2014 the management announced a new dividend payout policy which set to distribute around 30-50% of the total profit to the shareholders. However the current share price is not cheap, and it went up together with the other tech stocks. There is a risk for the share price to come down in the near future due to the stock market cycle. I am not going to buy the stock at the current price level as I think I have to hold it for a very long period to generate satisfied return. At current price the dividend yield is not so attractive too. So my plan is to monitor the business development and quarterly reports to get more information about the company, and buy it at a lower valuation (PE>10, PB>1.5). DYODD!