ISDN Holdings

(29-07-2020, 08:29 AM)Squirrel Wrote: Leading companies like

Fanuc       61x PE
Yaskawa    68x PE
Schneider   22x PE
ABB           50x PE
Rockwell     28x PE

are trading at much higher multiples. This just leaves ISDN with a lot of room for growth.

For a long time, I have really struggled to understand the core business of ISDN in simple layman terms. Interestingly, this thread doesn't have much discussion on it either. As shareholders, I do hope we can have more discussion on its key business - Precision Motion Control, Industrial Computing Solutions. Afterall, it derives more of its revenue from its "Industrial Automation Solutions" segment, and it could serve as a good gauge on how much more it can grow its business. 

From my understanding, ISDN is more a solutions provider(e.g. of motion control) than product manufacturer. As such, the above companies may not be the best comparision. Having said that, I am really strugging to find examples of competitors of ISDN, given the nature of its engineering solutions provider business. Given ithat t operates in China, I do wonder how does it hold up against its chinese competitors - I am inclined to think that the chinese can come out with competitive offerings, think Huawei, Xiaomi, Midea, Haier, Geely etc.

Since it is a solutions provider, I think that's why it has frequently mentioned its 10,000 customer base(previously, I have no inkling why this is impt to be mentioned). As a solution provider, the more customers you work with => more experience in customizing solutions for different types of customers => stronger industry know-how. Since only abt 20% of ISDN sales are recurring in nature, it has to keep looking for new customers(and across various industries).

I think unlike the retail industry where companies like Challenger, Sheng Siong, Fairprice, Hyphens have ventured into having their own in-house brands rather than being a "middleman", ISDN has chosen to diversify via hydropower, disinfectant solutions, solar, etc.

And the rerating starts to come in.

CGS CIMB rerates to $0.501

https://s3-ap-southeast-1.amazonaws.com/...1597106680

(10-08-2020, 08:12 PM)dreamybear Wrote:

(29-07-2020, 08:29 AM)Squirrel Wrote: Leading companies like

Fanuc       61x PE
Yaskawa    68x PE
Schneider   22x PE
ABB           50x PE
Rockwell     28x PE

are trading at much higher multiples. This just leaves ISDN with a lot of room for growth.

For a long time, I have really struggled to understand the core business of ISDN in simple layman terms. Interestingly, this thread doesn't have much discussion on it either. As shareholders, I do hope we can have more discussion on its key business - Precision Motion Control, Industrial Computing Solutions. Afterall, it derives more of its revenue from its "Industrial Automation Solutions" segment, and it could serve as a good gauge on how much more it can grow its business. 

From my understanding, ISDN is more a solutions provider(e.g. of motion control) than product manufacturer. As such, the above companies may not be the best comparision. Having said that, I am really strugging to find examples of competitors of ISDN, given the nature of its engineering solutions provider business. Given ithat t operates in China, I do wonder how does it hold up against its chinese competitors - I am inclined to think that the chinese can come out with competitive offerings, think Huawei, Xiaomi, Midea, Haier, Geely etc.

Since it is a solutions provider, I think that's why it has frequently mentioned its 10,000 customer base(previously, I have no inkling why this is impt to be mentioned). As a solution provider, the more customers you work with => more experience in customizing solutions for different types of customers => stronger industry know-how. Since only abt 20% of ISDN sales are recurring in nature, it has to keep looking for new customers(and across various industries).

I think unlike the retail industry where companies like Challenger, Sheng Siong, Fairprice, Hyphens have ventured into having their own in-house brands rather than being a "middleman", ISDN has chosen to diversify via hydropower, disinfectant solutions, solar, etc.

Hi

You are right that ISDN is a solutions provider and its not right to directly compare the PE to the manufacturers. I had looked at it from a correlation and leading indicator point of view with increases in their sales of motion control parts into China.

Lets start with definition of Motion Control Solutions Provider

"Motion control solutions is the accurate control of the movement of an object based on speed, distance, load, inertia or combination of all these factors. Thus a motion control system is a precise electro-mechanical assembly that can be a functional module of a machine or a complete machine by itself. Different from motion control products manufacturers, motion control solutions providers not only distribute products, they may also design, assemble and install motion control systems with components sourced
from suppliers for downstream clients as this would enable such client to reduce costs and improve production efficiency. In order to increase their competitiveness, motion control solutions providers are likely to provide comprehensive services with customization. The main downstream industries of motion control solutions market include, among others, machine tools, food & beverage packaging machinery, semiconductor and electronics industry, rubber & plastics machinery, automotive industry, medical
device/production machinery, industrial robotics, textile machinery, printing machinery."


An apple to apple comparison can be with the following motion control solution providers

Allied Motion Technologies     35.74x  FY2020 Est
Rockwell Automation             30.82x FY2020 Est (larger player in PRC providing solutions and manufacturing their own parts)
Siemens AG                           21.21x FY2020 Est (larger player in PRC providing solutions and manufacturing their own parts)

CGS CIMB suggests the following additional ones

Altra Industrial Motion             22.94x FY2020 Est
Hiwin Technologies Corp         49.42x FY2020 Est
Omron Corp                           42.7x FY2020 Est

Back in 2015, the overall motion control solutions market in China is about $2.57b, with ISDN holding 4th position at 5.1% of market share. Top 5 rounds up to a total of 29.6% with top market share being 8.7%. In Singapore, ISDN holds pole position as largest market share participant at 10% of the market in 2015.

Suffice to say, ISDN is considered one of the larger players for motion control solutions providers in China. Whether it should be attributed the higher P/E attached to bigger players would be up to an individual's interpretation and opinions. Currently the estimated FY2020 PE for ISDN is less than 10. And it has yet to include contributions from the disinfectant business.

For more reading materials, you can look at the following research commissioned a few years back
https://www.isdnholdings.com/download/hk...072016.pdf

And the latest presentation slides
https://repository.shareinvestor.com/sgx...YA6X.4.pdf

Hope this helps.

Is anyone signing up for the Teleconference?

https://www.nextinsight.net/story-archiv...s-briefing

Had attended the meeting yesterday and William from CGS CIMB and Kenny from KGI were both on it. Kenny has promptly updated his TP to $0.47 by assuming $14m PATMI in his report as follows

https://s3-ap-southeast-1.amazonaws.com/...1597889844

This is really conservative as they are bogged down by the performances in 2H18 and 2H19. To me, those 2 are not seasonal adjustments. But rather there are particular reasons for the poorer performance. This should not be repeating in 2H2020 under the strong backdrop of a Covid19 induced move towards automation.

As per the results briefing, it was mentioned that

Overview

- Current order book as of 19 Aug is $88m, in the May update, it was mentioned that the order book was $95 in Mid March and that produced a record month in Apr 2020 of $32.4m in revenue
- The Jul figures are out and it is a historical monthly number even outstripping the Apr 2020 revenue
- Combining the orderbook on hand and recognised revenue in Jul, 2H 2020 performance is at minimum $120m. I am personally expecting Aug to be another bumper month comparing orderbook against what was announced in May 2020
- In summary 2H2020 revenue is likely to outstrip 1H2020 imho

Coating/Disinfectant Business

- The Chairman acknowledged that the Disinfectant business is not yet accounted for in the 1H2020 Financial Statements, thus the final FY2020 statement would include the full impact of the business
- The company did not reveal the size of expected revenue in the disinfectant business
- As per the announcement prior, they have secured the business of a public bus operator
          - For reference, SBS has 3,512 buses as of Dec 2019 https://www.sbstransit.com.sg/Uploads/In...tement.pdf
          - SMRT has about 1,250 buses https://www.smrt.com.sg/News-Room/Information-Kit
- Depending on which disinfectant service they provide, it could vary on the cost of it. But i suspect it won't be earth shattering earnings. ISDN holds 51% of the JV.
- The sector does carry other coating such as anti mould and anti algae, which the chairman alluded to as having billion dollar industries in Asia https://www.erstapac.com/

Hydropower

- 2 out of 3 of the mini hydropower projects are 98% complete, pending testing which is delayed by the pandemic
- the construction on the last is 50% done and expected to be completed in 2021 with $9m more of construction revenue to be booked (might not be in 2H2020)
- monetisation of the power plants is possible

Now comes the next part which is my own conjectures. Having discussed the motion control solution business, I am interested in the Hydropower business and their contributions to the bottomline. Please do your own research as much of the input here is from my own further research into the company and shouldn't be taken at face value. Caveat Emptor.

Analysis on Hydropower

As of 1H2020 announcement, there is a total of $54.5m in service concessionary receivables. This is likely to increase by another $9m by virtue of additional construction cost.

As per AR2019, Pg 173

The Group has a 50% interest in Aenergy subgroup, which is primarily involved in developing mini-hydropower plants projects in Indonesia. Aenergy, through its subsidiaries, entered into two long term service concession arrangements with PT PLN (Persero) (the “Grantor”), an Indonesia government-owned corporation to build and operate 2 mini-hydropower plants, namely PLTM Anggoci and PLTM Kandibata 1 (collectively the “Power Plants”) in North Sumatra Province, Indonesia. The construction of the 2 power plants are expected to be completed and available for use in 2020.

Pursuant to the service concession arrangements, the Group has to develop (build, operate and transfer (“BOT”), including designing, planning, engineering, financing and constructing, testing and commissioning of, the Power

Plants. The concession period is 25 years from the commercial operation date. The Group will be responsible for any maintenance services required during the concession period. Under the terms of the agreement, the Group
agreed to distribute and sell all electricity produced by the Power Plants to the Grantor and the Grantor agreed to buy all the electricity generated by the Power Plants at the purchase prices determined in the relevant power
purchase agreements. At the end of the concession period, the Power Plants become the property of the Grantor and the Group will have no further involvement in its operations or maintenance requirements.

It is also mentioned on pg 111

Amortisation is provided on a straight-line basis over the operation phase of the concession periods.

So it looks like there will be $63.5m of concessionary receivables will be amortised at $2.54m a year over the life of the power plants. I assume this is for all 3 plants, not sure why the third was not mentioned. The construction cost seem to measure up to 3 plants according to my research.

Let's look at what the recurring income would look like.
- Going by 7.89 US cents on the 9MW Anggoci plant and 10MW Kandibata plant, and 6.00 US cents on the Sisira plant (Again assuming for all 3 plants),
- and 0.7 US cents cost per kWh (range of 0.5 - 0.7c was announced previously)

The income per year would be estimated at SGD12.9m per year. Netting off against amortization would be $10.46m net income.

Do note that ISDN ownership is Kandibata (24.5%), Anggoci (40%) and Sisira (40%). Net Income attributable to equity owners would come out to be about $3.4m a year. Under the BOT arrangement, and operating the plant to end of concession period will mean $3.4m recurring income for next 25 years.

If the company intends to monetise the plants, at a 6% yield discount (PLN is government owned, and 1Y indonesia sovereign yield is about 3.8% at the moment) would give rise to about $165.4m price tag. Netting off the Service Concession Receivables would be circa net $101.9m. Attributable to equity owner is about $33m. That's what a sale might look like from my perspective.

Conclusion
At the current traded price of $0.375 ($161m market cap), is this expensive, cheap or fairly valued? With the profit catalysts firing on all cylinders, I believe the $0.47 TP would be revised soon by Kenny. During the call, even William was wowed by the Jul performance. He literally said "Wow". So perhaps he would relook at the circa 60% discount on multiples that he had attributed to ISDN versus its competitors. A direct competitor Hiwin was quoted during the call, and from a comparison of Q1 to Q2 performance, ISDN is outperforming (though there is no breakdown into China for Hiwin) relatively on available information.

To me, this company is really cheap. Have vested more while I am writing this.

Seeing that there has been analysis and TPs placed out there, I would like to form a TP of my own after the analysis done above.

I would look at the valuation of the company on a sum of parts basis. As mentioned above, I would estimate the current value on the Hydropower plants at roughly $33m ($0.077 per share) attributable to owners of the firm, so how about the rest of the firm.

As per 1H2020 Financials, profit attributable to equity holders of the company is $9.572m. Construction gross profit is $1.489m. The hydropower plants have a meshed participation of circa 33%, so taking the Hydropower portion of the business away would land at Revenue of $147.098m and profits of $9.08m for 1H2020. Let's then look at how 2H2020 is doing. >$32.4 in July with $88m on the orderbooks. I would hazard a guess that the 2nd half of the year would average $30m a month in revenue adding up to $180m. Using a net profit margin of 6.17% indicated by 1H2020 would arrive at $11.11m profits. Full year profits will be circa $20.19m.

So looking at the comparables mentioned (let's do away with any price movements upwards during this period of time).

Allied Motion Technologies     35.74x  FY2020 Est
Rockwell Automation             30.82x FY2020 Est (larger player in PRC providing solutions and manufacturing their own parts)
Siemens AG                           21.21x FY2020 Est (larger player in PRC providing solutions and manufacturing their own parts)
Altra Industrial Motion             22.94x FY2020 Est
Hiwin Technologies Corp         49.42x FY2020 Est
Omron Corp                           42.7x FY2020 Est

If we tag valuations to
- the highest multiple of 49.42x, we will get $998m equity valuation ($2.32 per share) + Hydropower ($0.077 per share) = $2.40
- the lowest multiple of 21.21x, we will get $428m equity valuation ($1.00 per share) + Hydropower ($0.077 per share) = $1.08
- average multiple of 33.80x, we will get $683m equity valuation ($1.59 per share) + Hydropower ($0.077 per share) = $1.67
- KGI's multiple of 14.0x, we will get $283m equity valuation ($0.66 per share) + Hydropower ($0.077 per share) = $0.74
- CGS CIMB multiple of 10.0x of FY2021 assuming 10% growth Y-O-Y, we will get $222m equity valuation ($0.52 per share) + Hydropower ($0.077 per share) = $0.60

By all measures, the current $0.365 is really cheap. My own personal TP would be at the lowest multiple range which is $1.08 as I do believe that anything below that, we are probably better off holding the counter for a few years for the growth to manifest. This is a once in a lifetime pandemic resulting in a marked shift to industrial automation globally. The comparable basket shows it. Its just not showing in ISDN... yet. I am personally very excited about this counter as it is not much talked about even up till now. The more neglected a counter is, the more likely it is undervalued.

Finally, would like to discuss the disinfectant part of the business.

Honestly, there really ain't visibility into this part of the business in the results briefing. At least not for the revenue part.

https://www.nextinsight.net/story-archiv...-currently

In the call, the boss has emphasized on them having a very good product. And honestly, from the description of Waterliq and Erstotizer, they are indeed very good products. Do reference the above link for comments on testing done on the products, the shelf life and the non hazardous nature of the disinfectants. Personally, it sounds like a really good product, especially my first concern would always be whether its harmful to humans.

What we know at the moment
- one of the public bus operators have engaged the company in administering the disinfectants/coating
- Centurion, which is at the centre of the high profile dormitory clusters, has engaged Erstapac as well to set up disinfecting gantries and apply the longer lasting coatings (https://links.sgx.com/FileOpen/ISDN-PR-C...eID=610199)
- if the following LinkedIn profile is to be trusted (has 500+ connections), it states that "References: Clients include SGH, KTPH, Raffles Hospital, SAF". It would seems like major hospitals + the SAF is using the following products (https://sg.linkedin.com/in/bilal-ismail-7a01b411)
- the company has set up shop to allow direct purchase of Waterliq (https://www.erstapac.com/shop)

In general, the company seems to have done quite a good job in securing both high profile and sizable public projects in Singapore. Of course, the question still remains on how much income that would translate to. Hopefully there will be guidance before the next results announcement. MD and President CK Teo has refrained from commenting on the materiality of the business throughout the results briefing. I believe the reason might be due China having  yet to launch due to travel restrictions. That market would probably dwarf any other markets in terms of contributions.

If you look carefully into the LinkedIn profile, the guy is employed both in Erst Asia Pacific and Servo Dynamics. This to me indicates that they are intending to cross sell across their groups which makes perfect sense. It has been repeated more than once that ISDN has more than 10,000 clients. (In the call, MD and President CK Teo did indicate that by now the statistics should be even higher than 10k). Imagine the network effect that enables sale to corporates across their client base.

Just a last little titbit of information for the fun of it. Science Centre is using Erstotizer as part of their efforts in achieving SG Clean certification and reopening to public! (https://www.science.edu.sg/scs-reopening) The SG Clean certification process requires cleaning and disinfection of frequent touch points. (https://www.sgclean.gov.sg/)

Isn't it great that the scientists gave the product their vouch of confidence!

https://www.investingnote.com/posts/2077109 SMRT

Business Update:

ISDN announced today the completion of a 3-day pilot project with a major local bus transport company, involving administering its German-made ERSTOTIZER, an anti-microbial surface coating, on all the high-touch points of 130 buses, inclusive of single-decks, bendies and double-deckers, over the past three nights to strengthen anti-COVID capabilities for the safety of commuters in a cost -efficient manner.


https://links.sgx.com/FileOpen/ISDN-PR_E...eID=630028

In between various sites, I have been seeing some discussions on ISDN. Most of them revolve around the Disinfectant and Coating business. I have discussed the various business segments of the company which is being made up of Industrial Automation, Disinfectant and Coating, and Hydropower. And I must emphasize from my own point of view, the gem in this company lies in the Industrial Automation Solutions segment! There has been a rough estimate of the value of their Hydropower business being done (just to make sure I don't miss any potential uplift) at circa $33m. And basically all my discussion up till now has allocated $0 to the disinfectant business simply because that's not the focus.

I would thus like to focus on the Industrial Automation Solutions segment with the latest release of industrial production figures for Aug 2020.

https://finance.sina.com.cn/stock/stockz...0841.shtml

Excerpt from the report

“工业机器人产量持续加快，反映出制造业升级趋势。8月工业机器人产量同比增长32.5%，增速比7月19.4%加快，今年以来工业机器人产量增速出现上升趋势。”

This is the part that I would pay attention to. I have gone back to regress the change in industrial robots production against the change in revenue for the last 6 years on an annual basis. The correlation coefficient comes up to 0.92. 1 represents a perfect correlation while a -1 represents a perfect negative correlation. Needless to say, that makes the industrial robot production figure a very important statistic to watch for.

1Q Voluntary Announcement
https://links.sgx.com/FileOpen/ISDN-PR-B...eID=612670

As per the first Q voluntary announcement, "revenue from Group’s core business declined by 16.5% YoY to S$61.5 million for 1Q2020". Correspondingly, industrial production for robots was down 8.2% Quarter on Quarter. I attribute the more drastic drop for ISDN to uneven lockdowns across China. But its a good stat to review.

1H Financial Results
https://links.sgx.com/FileOpen/ISDN-Ann-...eID=626886

As per the 1H results, we can derive the 2Q core business revenue change. 2Q2020 is circa $85.6m. 2Q2019 is circa $70.7m. That's roughly +21.1% year on year for Q2. Industrial robots production increased by 26.6%, 16.9% and 29.2% respectively in Apr, May and Jun. So how's that for correlation?

Now comes the crux. Extrapolating the business results which makes this company so undervalued.

Industrial robots production increased by 19.4% in Jul and 32.5% in Aug. 2H2019 revenue for IA solutions business is about $141.9m. How much would you expect for IA solutions business for 2H2020? At an assumed 25% expansion, you would get about $177m. We already know that Jul was a historical month revenue wise (more than the $32.4m registered in Apr 2020) so $177m is not far fetched.

During the results call, there was an attendee who I think is very sharp and came up with the question on what is driving the improvement in the profit margin? Is it product mix? Pricing? Mr CK Teo did not directly answer the question and commented that its hard to tell given the diverse customers base.

What arises from the question is I believe the astonishing growth in profit margins in 2Q2020. On the back of $87.4m of revenue, the net profit after tax and minority interests comes up to circa $6.5m. That's a historic high of 7.4% margin. And I believe that there is a basis to believe that this margin will persist with the push for Made in China 2025. Companies will choose the higher value adding solutions and minimise human labor.

A 7.4% margin on $177m gives $13.1m PATMI in 2H2020. Add that onto the $9.6m in 1H 2020 and you get $22.7m for FY2020, and that's with lockdown months in 1Q2020. As I am writing this, the shares at trading at $0.38, $165.4m market cap. Do you think that a company that is going to enjoy multi years of growth is expensive at 7.3x FY2020 PE? Well, you can refer back to the list of comparables in earlier posts and see where they are trading at. At least KGI seems to think it should be 14x.

And on last bit of why I think automation will persist for the next few years. Another company that I currently hold in my portfolio is Ten Pao Group (1979 HK). I have gone through the ARs and it is evident that they have been moving forward with automation of their production lines for many years. The reason is simple. They can't shut down all the production lines in order to upgrade the production system. It has to be done line by line, one after the other. And that is also why I think that in the foreseeable future, ISDN is going to benefit from this shift in IA. This is just the beginning.

The gem is not in the disinfectant business. That's a bonus. The gem is in the Industrial Automation Solutions.