ECS

I’m still quite new to stock analysis, so appreciate all advice/comments in the following & future postings in the forum:

I understand that ECS Holdings profit margin has been affected for the past 2 years, due to the consumers shift from desktops and laptops, to portable devices such as mobile phones.

However, I looked at their Q2 results (Q3 should be out soon), which their revenue increased by $193.9 million to $1.02 billion compared to FY12Q2, due to better performance by Distribution and Enterprise Systems segments

Net income has also grown by 20.3% (17.4mil vs 14.4mil) in the 1st 6 months of this FY compared to the last FY.

Using the last 4 quarters, Total Net Income after tax is 32.6mil. If we use the latest total equity of $355mil and asset of $1,070.7mil, ROE = 9.1% and ROA = 3.0%. Not that great, but at least improving from the end-FY12 of 8.7% and 2.8%.

With an increase in China’s demand for iPhone 5 (http://appleinsider.com/articles/13/09/2...es-to-345m), in addition to their rise in other segments & their low PTB (0.55) & consistent dividend since 2002, does this mean that ECS have steadied & might turn-around soon?

(not vested, but on watchlist)

China market has its huge potential but it is very competitive as well. The IT distribution market in China is dominated by 4 main players: (1) Digital China, (2) Synnex, (3) Ingram Micro and lastly (4) ECS China. All 4 players are listed, so you have public access to their financials. If you look at their 2012 financials, DC is 3.5x and Synnex is at least 2x ECS China Operations. I can't remember about IM but they are more into upstream IT component distribution. As much as ECS wish to show that they are among the top 4 in the China market, it is more likely to be a two- or three-horse race. So you already have 60% of ECS's revenue which is operating in a highly competitive market and these are no ordinary competitor. Synnex is the largest IT distributor in Asia-Pacific. IT distribution is all about working capital management: Who has the stronger financing muscle can enjoy the bulk of the distributing volume.

Then, you have another 27% of revenue which is derived from ASEAN ex. Singapore. From their holding structure, you know Philippines and Malaysia are consolidated as associate recognition. So topline revenue should include only Thailand and Indonesia (ECS has no operations in Vietnam). ECS Thailand operates via their subsidiary The Value System. Last I heard, Thailand IT distribution is not doing well - especially in the area of notebooks albeit smartphones market is the opposite story. (http://www.bangkokpost.com/business/mark...-this-year) So you have another 27% of revenue which doesn't seem rosy either.

Lastly, you have 13% of revenue which is derived from Singapore. This market is already saturated and I don't expect any strong growth to compensate the lacks from the other markets.

In summary, what I am trying to highlight is that ECS has too many moving parts. Unless APAC boom as an entire region for IT distribution, it is very hard for them to enjoy a strong turnaround. Yes, 0.5x P/B is cheap (probably around 0.6x on net tangible book) and it might be attractive if ECS operates in a single market but in this case, the probability for all to succeed together will be low.

By the way, IT distribution is a narrow thin margin business. you need sales volume to kick in the operating leverage. Current NPM of 1% is typical for saturated markets. Hence, markets tend to discount them on their valuations.

(23-10-2013, 11:11 PM)dzwm87 Wrote: China market has its huge potential but it is very competitive as well. The IT distribution market in China is dominated by 4 main players: (1) Digital China, (2) Synnex, (3) Ingram Micro and lastly (4) ECS China. All 4 players are listed, so you have public access to their financials. If you look at their 2012 financials, DC is 3.5x and Synnex is at least 2x ECS China Operations. I can't remember about IM but they are more into upstream IT component distribution. As much as ECS wish to show that they are among the top 4 in the China market, it is more likely to be a two- or three-horse race. So you already have 60% of ECS's revenue which is operating in a highly competitive market and these are no ordinary competitor. Synnex is the largest IT distributor in Asia-Pacific. IT distribution is all about working capital management: Who has the stronger financing muscle can enjoy the bulk of the distributing volume.

Then, you have another 27% of revenue which is derived from ASEAN ex. Singapore. From their holding structure, you know Philippines and Malaysia are consolidated as associate recognition. So topline revenue should include only Thailand and Indonesia (ECS has no operations in Vietnam). ECS Thailand operates via their subsidiary The Value System. Last I heard, Thailand IT distribution is not doing well - especially in the area of notebooks albeit smartphones market is the opposite story. (http://www.bangkokpost.com/business/mark...-this-year) So you have another 27% of revenue which doesn't seem rosy either.

Lastly, you have 13% of revenue which is derived from Singapore. This market is already saturated and I don't expect any strong growth to compensate the lacks from the other markets.

In summary, what I am trying to highlight is that ECS has too many moving parts. Unless APAC boom as an entire region for IT distribution, it is very hard for them to enjoy a strong turnaround. Yes, 0.5x P/B is cheap (probably around 0.6x on net tangible book) and it might be attractive if ECS operates in a single market but in this case, the probability for all to succeed together will be low.

By the way, IT distribution is a narrow thin margin business. you need sales volume to kick in the operating leverage. Current NPM of 1% is typical for saturated markets. Hence, markets tend to discount them on their valuations.

Wow, thank you very much for the detailed insight on the company and its' competitors. I guess I still have much to learn and analyse.

With huge volume required for profitability, this reminds me of another stock which I recently sold due to the same reason...I'll still keep an cautious eye on the next few quarters results, as I noted that in their last news announcement, estimated overall FY is likely to be satisfactory.

Business is growing but market is not pricing it as a growth stock.

Margins are very thin but the company has been profitable every year as a listco. Regular dividend too.

Even if they are not the "top 3 horses", they have enough volume to make a profitable business.

In fact, the size looks just right as an acquisition target in an industry which is in the consolidation phase.

http://ir.avnet.com/history.cfm

Very pretty price/volume pattern displayed this month.

(28-11-2013, 12:26 PM)cif5000 Wrote: Business is growing but market is not pricing it as a growth stock.

Margins are very thin but the company has been profitable every year as a listco. Regular dividend too.

Even if they are not the "top 3 horses", they have enough volume to make a profitable business.

In fact, the size looks just right as an acquisition target in an industry which is in the consolidation phase.

http://ir.avnet.com/history.cfm

Very pretty price/volume pattern displayed this month.

ECS was already acquired back in 2007 by VST Holdings which is listed in Hong Kong. Don't expect another general offer because back then VST had more than 90% and then restored the free float.

In my opinion, this is an extremely tough business but also very well run. All the turnover ratios have been stable for the past 10 years. Its really hard to be a growth stock because of the thin gross margins (to double EPS revenue also needs to more or less double). How many times can you double revenue at a high base?

i think if i remember ST Electronics had ECS then divest it.

The business of ECS, together with Multichem, seem to indicate a level of inflexibility in matching revenue with administering and selling expenses.

Even if business is bad, you still need to keep and get new staff so that you have that capacity IF business comes in.

that put a massive drag.

not sure about the other IT guys in here, but System integrators like them usually earn from either maintenance (think seldom usually turn key), a percentage over cost professional service. They don't earn much from selling the stuff (low margin)

competition can be brutal.

end of the day i felt the relationship and rainmakers tend to matter more.

I once researched on ECS before, the high gearing level is a big turn off to me. For exposure in distribition i prefer karin which i previously wrote in detail before, net cash position and 7% yield.

Essentially, you need a very good working capital management for a distribution business so you can 'turn' your asset rapidly. It was never a high profit margin game but it depends critically on sales volume.

An IT distribution should earn roughly 2% optimally but most of the developed countries do around 1% or less, largely because of higher competition as a result of better infrastructure system.

But operating leverage is the point of this game where you can improve bottom line profitability from 1% to 1.5% or even 2%.

ECS does have a very lean working capital structure at 30 days? But as from my earlier post, their regional exposure has too many moving parts.

I think Aggregate Asset owns some ECS if I am not wrong.

(28-11-2013, 05:23 PM)dzwm87 Wrote: Essentially, you need a very good working capital management for a distribution business so you can 'turn' your asset rapidly. It was never a high profit margin game but it depends critically on sales volume.

An IT distribution should earn roughly 2% optimally but most of the developed countries do around 1% or less, largely because of higher competition as a result of better infrastructure system.

But operating leverage is the point of this game where you can improve bottom line profitability from 1% to 1.5% or even 2%.

ECS does have a very lean working capital structure at 30 days? But as from my earlier post, their regional exposure has too many moving parts.

I think Aggregate Asset owns some ECS if I am not wrong.

remember they talked about it.

Check out ECS ICT BHD profit margins. ECS bright spot is their SEA distribution network and the ability to secure distribution rights for desirable products like ASUS Padfone