CDW Holdings

[Aldar]

Any thoughts/analysis of this company?

http://sgx-stocks-sti.blogspot.sg/2013/0...mited.html

why not post your thoughts?

Hi Drizzt,

I'm a huge fan of your investment moat blog.

A. Quant Screen
CDW ranked favorably on my quant screen using Bloomberg, using the criteria of:
1. ROIC: EBIT/[(Current Assets - Cash) - (Current Liabilities - Short-term Debt) + Net PPE]
2. EV/EBIT
3. P/B

B. Observations

1. SGX-listed firm with majority of manufacturing facilities located in China; senior management comprised mainly of Japanese (founder is a Japanese), customers are mainly Japanese firms with manufacturing facilities in China

2. Recent dividend yield and DPS growth is quite interesting, though I have not checked its payout ratio. Under the previous Founder CEO, the share price suffered and there was controversy regarding directors' remuneration.

3. Recent sale of the land associated with its loss-making Suzhou factory to the government (compulsory land acquisition for residential purposes) seemed very timely; proceeds repatriated to HK unit

C. Uncertainty

I'm totally not familiar with its core LCD Backlight Unit business which is linked to the growth of the smartphone, tablet and gamebox entertainment equipment industry.

I would have thought that LCDs in general is a super cutthroat business with giants such as Sharp incurring huge losses associated with its LCD TV division (but I also think that LCD TV and LCD Backlight Unit are two different products).

D. Personal Opinions

In my opinion (and due to my lack of knowledge of the tech manufacturing business), the business is highly reliant on the company's relationship with their clients and the strength of its management.

I'm not sure:
- how high are the clients' switching costs
- if there are any potential barriers to entry (such as qualified,experienced technicians needed or whether the clients' production runs will result in a more 'sticky' business relationship with CDW)
- who its competitors are

Regards,
Aldar

[Greenrookie]

Hey aldar,

I was looking at CDW too recently for its seemingly high yield and profits resilence. I was rather uncomfortable with 2 things though:

1) large amount of share options for directors and executives. It is not 1-off .

2) after prospectus, there is no info on major customers, but I think customers are still concentrated. An single order from a game console customer is enough to make its profits in 2012 jump.

3) business direction. It tap on the outsourcing of Japanese tech firm to china. Although china costs of production is nowhere near japan, it is constantly increasing with labor costs etc. Competition is stiff with many companies with similar capabilities, the only real advantage seem to be the founder network with Japanese companies. A advantage I am not very comfortable with.

This is not to say I do not like this company, but given the 4 points, I think I need a bigger margin of safety. Payout ratio is already quite high.

http://sillyinvestor.wordpress.com/2013/...a-example/

[Aldar]

Hey aldar,

I was looking at CDW too recently for its seemingly high yield and profits resilence. I was rather uncomfortable with 2 things though:

1) large amount of share options for directors and executives. It is not 1-off .

2) after prospectus, there is no info on major customers, but I think customers are still concentrated. An single order from a game console customer is enough to make its profits in 2012 jump.

3) business direction. It tap on the outsourcing of Japanese tech firm to china. Although china costs of production is nowhere near japan, it is constantly increasing with labor costs etc. Competition is stiff with many companies with similar capabilities, the only real advantage seem to be the founder network with Japanese companies. A advantage I am not very comfortable with.

This is not to say I do not like this company, but given the 4 points, I think I need a bigger margin of safety. Payout ratio is already quite high.

http://sillyinvestor.wordpress.com/2013/...a-example/

Hi GRook,

Many thanks for the insights, the points you have raised are important red flags and I think I need to spend more time to understand this company.

[Ginger]

CDW at current price, with proposed dividend of USD 7 cts, is it enough safety margin to buy? Am thinking to buy some and keep for dividend yield. Any opinion would be appreciated

[Shrivathsa]

The annual dividend will be around 1.2 US Cents. At present, trading slightly below book value , where book is at 14.54 cents. So, okay yield, asset below book, makes it a buyable stock in my book.

[valuebuddies]

Regarding to those points Greenrookie highlighted below:

1. large amount of share options for directors and executives - all have been fully converted and as of 31.12.2013, there are no outstanding share options in issued. The share options granted to the executive in year 2008 totalling 19,032,000 options which is less than 4% of the total shares in issued, and the exercise price of S$0.07 approximates the quoted price at the issuance date. In short, I think the company is fair enough to the minority shareholders.

2. after prospectus, there is no info on major customers, but I think customers are still concentrated - Yes, the LCD business is still concentrating, I suspect the major customer is Sharp but I can't be sure. And in the latest results announcement, we know that the major customer will cease to involve in the procurement process which results in uncertainty over the sustainability of the future orders.

3. business direction - IMO having factories in China not only reduces the overall productions and operation costs, but also to stay close to its customers as I believe that it's products should ultimately be delivered to other factories in China as well.

On the financial information side, I noticed a significant drop in revenue and EBITA from 4Q2013 announcement, but it still produces a decent US$0.62c EPS for Q4 and US$2.41c EPS for FY2013, which translates into PE of 4.7. It maintained the interim and final of US$0.005 and US$0.007 respectively which is approximately 50% payout (this is not high).

The good things about this company is the huge net cash (about S$11.5c versus share price of S$14c), generous dividend yield (more than 10% yield), fabulous gross margin (more than 20%), low PE and below book valuation.

My only concern would be the significant concentration on 1 major customer. Unlike UMS, we have very limited information on this major customer and it could be just a time bomb as likely it will turn into losses without the support from this major customer.

I would appreciate if fellow members can contribute your views over this company, meanwhile I will continue to put this under my high priority watchlist.

[Ginger]

Many thanks for your opinions, maybe I'll nibble a little and hope to make a small profit when they pay the 7 cts dividend.

[level13]

Many thanks for your opinions, maybe I'll nibble a little and hope to make a small profit when they pay the 7 cts dividend.

Do note that they are NOT paying 7 cts. The actual amount is 0.7 cts, which is less than 1 cts.

You may be disappointed because the stock price usually adjust downwards after they pay out the dividends.

[Shrivathsa]

Actually, it is 0.7 cents and another 0.5 cents sometime later

[Shrivathsa]

I have put together my brief analysis on CDW. As I see it, the share is worth between 19 cents to 29 cents a share, here is the link to the analysis.

http://sgx-stocks-sti.blogspot.sg/2014/0...lding.html