Dutech Holdings

Quite interestingly, Dutech has hit $0.30 today. More to come?

Dutech has updated it's website to better communicate and reflect it's business. The latest website is so much better than the previous version.

http://www.tristarinc.com/

To get a better appreciation of Dutech's business, do take a look at the new
website.

I am always a late-comer. I noticed this S-chip in VB, and found it very interesting. I hope I didn't miss the boat yet.

The company seems has taken an advantage, on the "euro crisis" and acquired valuable assets with very cheap price. First with FORMAT in 2011, and Deutsche Mechatronics recently.

(not vested, but monitoring)

I am monitoring too but naturally, I am still haunted and scarred by S-Cheaps.

I'm curious though why the company did not pay dividends the last two FYs..it was only after much shareholder unhappiness that a dividend was declared in 1Q to appease them. Nevertheless, from my past S Cheap experience, consistent dividend payouts and insider buying are not indicative of anything.

(26-11-2014, 01:43 PM)sgpunter Wrote: I am monitoring too but naturally, I am still haunted and scarred by S-Cheaps.

I'm curious though why the company did not pay dividends the last two FYs..it was only after much shareholder unhappiness that a dividend was declared in 1Q to appease them. Nevertheless, from my past S Cheap experience, consistent dividend payouts and insider buying are not indicative of anything.

I will advice those have no confidence on "S-Cheaps", to remain non vested. Knowing well on your investment(s) and staying in confidence, are very important to avoid damages by "fear". It is not a sarcastic remark, but a sincere advice

No worries Cityfarmer, I certainly do not think there is any sarcasm whatsoever in your remarks at all. I am personally still vested in two China stocks - China Aviation Oil and Ying Li. I am also holding Qingmei as well but I have written that stock off. Leaving it in my portfolio as a harsh reminder to myself.

I'm sure not all the apples in the basket are rotten and I guess that it is only due to the fear of S Cheaps that we can get such attractive valuations on some of them.

found 2 tax info in Dutech Subsidary.... will dig deeper

http://kfq.tz.gov.cn/KFQ/infodetail/?inf...Num=001006


http://www.ntkj.gov.cn/art/2014/1/27/art...01618.html

Hi,

I've been observing this thread for a while. Being a Dutech shareholder, thought it might be helpful if I shared some of the reasons why I bought it and a brief analysis.

Regarding corporate governance, there probably is no sure proof way of finding out how honest a management is, but here are some clues which gave me some comfort compared to other S-Chips.

1) The more typical but inaccurate indicators such as management ownership. (founder and his brother owns more than 50%)

2) Strong base of shareholders including Droege Capital, Robert Alexander, Kim Seng Holdings (again, this alone does not say much)

3) CEO background, western educated and spends most of his career in western companies. (probably more used to western way of doing business and capable in running a global business.)

4) 2 foreign director, Walter P.J Droege and Christoph Hartmann (will touch more on that later)

5) Global multinational customers

6) M&A transactions with foreign enterprises such as Format and Deutsche Mechatronics. Companies might be able to fake PPE in China, but I doubt they can do it globally.

7) Walter Droge, who is the chairman of a private equity com pay sold one of his company "Format" to Dutech in exchange for shares and cash. The contract for him to cash out his investment in Dutech expired earlier this year, meaning, he could have sold his large stake(8%) if he wanted, but instead he chose to continue holding the shares, extending the holding period until 2020.

8) In 2011, Dutech borrowed money in SGD to pay dividend and reinvest in china for a yield spread. The borrowing was backed by deposits in China. Here I'm assuming the bank did its due diligence to ensure the money is indeed there before lending them the SGD.

While these factors alone might not mean much, as a whole, I think they provide a degree of assurance that the probability of outright fraud is lesser.

Regarding, the stoppage of dividends in 2012 and 2013. In 2011 when Dutech acquired Format for shares, the contingent liability in the event that Format wanted to sell it shares at expiry in 2014 did not include dividend. Simply put it, in the old contract, how much Dutech had to pay to buy back the shares did NOT include dividends given out. In the new contract, each time Dutech gives out a dividend, how much it has to compensate Droege Capital if Droege Capital wanted to sell the shares would decrease in proportion to the dividend. So basically, my guess is Dutech did want to give out dividend because they didnt wanna give Droege free money. They waited until the contract expired and renegotiated it and included the dividend portion and immediately gave out a dividend this year.

Regarding the dividends, according to the new contract the, maximum dividend Dutech is allowed to give for it to be deductible from the compensation contract roughly equals to 1.5cents SGD on average from now till 2019. From the dividend limit, my guess is Dutech might increase the dividends in future by as much as 50%.

As for their results, Dutech in fact has been performing well over the years, the results were distorted by their acquisition of Format, which was loss making, in 2011 and 2012. This can be seen again with their recent acquisition of Deutsche Mechatronics, which was also loss making. If you take out Detusche Mechatronics earnings in Q3, profits and margins from the rest of the company is actually higher.

With those core earnings numbers and if you net out the excess cash (management likes to be conservative) the PE multiple is ridiculously low.

Over the years, and their experience with Format has shown us that the management is prudent with cash, spending it strategically on viable M&A and most importantly are able to successfully turn around poor performing companies. Since the acquisition of Format, working capital and cash conversion cycle has returned to normal.

I think it's hard to predict its outlook, but from the surface, it seems like they are climbing the value chain, producing higher margin products and at the same time expanding their product range. The fall in steel prices have been a huge tailwind for their margins. I expect their business to grow in future because company has recently completed a factory that would double their floor GFA, so I'm expecting higher sales in future. Their "Advances to Suppliers" have been maintaing at a good level, so I'm assuming they are expecting robust business in future.

In any case, other than a steep drop in business, the price you are getting Dutech for is extremely cheap. So with a wide margin of safety and capable management, I'm comfortable with putting my money with them. My only grudge is poor investor communication, but that alone does not mean fraud.

PS: would appreciate it if anyone can provide any updates on their new factory, and strategy regarding their recent acquisition of Deutsche Mechatronics. Thanks

One more thing. Deutsche Mechatronics was loss making and has a large current liability right before acquisition. Given that it is a 70 year old company and Dutech provided them with a shareholder loan and capital injection, it does look like a company that was going to be bankrupt before it was rescued by Dutech. As for the huge purchase discount to NAV, my guess is that the owners of DM didn't want their company to be seized and closed down so they sold it to Dutech for a nominal sum with the promise of keeping DM operating in future, so I doubt Dutech would asset strip DM. Again, these are all guesses, would love to hear what the management has to say at the upcoming AGM.

Things that don't make business sense :

1) Wouldn't it be easier and cheaper just to hire the german engineers from DM if you are aiming at the tech? Surely they would be eager to jump a sinking ship?

2) And no, I do not think Germans would sell out their company to chinese and trust them to keep it running. In business world, once you sell out you lose control of business, buyer will not keep it running if its not profitable for them.

3) If a German company can't make it in this business sector, what makes a chinese company think they can do better? Germans well known for premium quality products and services. If these are not selling is the industry shrinking or who is outcompeting them? So if the acquisition is not a "chop up and sell for profit thing", even if they get some German tech below par value, what's the value in that technology if the germans are making losses from it.

4) DM has factory and business in Hangzhou China so take PPE reporting with grain of salt.

5) Cannot see the synergy from DM technology. Possibly some benefit from improving manufacturing processes but otherwise making ATM safes(Dutech) is very different from making Ticket machines(DM)??

(27-11-2014, 01:08 AM)swj80 Wrote: In 2011, Dutech borrowed money in SGD to pay dividend and reinvest in china for a yield spread. The borrowing was backed by deposits in China. Here I'm assuming the bank did its due diligence to ensure the money is indeed there before lending them the SGD.

Dutech did this primarily to workaround the withholding tax rule. The bank involved was OCBC China (deposit) and OCBC Singapore (loan), so it definitely knew that the money was there. OCBC was a shareholder at that time as well (& curiously exited at a low price of 13c).

According to Liu, the withholding tax rules changed in 2012, and they could no longer avoid it with their deposit/loan arrangement. As a result, he was hesitant to pay a dividend. I don't know what transpired (if any) that causes the resumption of dividend eventually. Perhaps other forummers can fill in here.