CDW Holdings

[BlueKelah]

Konbanwa...

CDW 4Q2014 Results Released : 27-Feb-2015 22:14:01

Wow CDW has very hardworking employees, release results so late.
Must be the Japanese Overtime.

Getting my PS4 soon

-v-

[yawnyawn]

From 4Q2014 Results,

Forging New Roads and New Ventures
The Group has over the year in review started to invest in a range of businesses aiming to achieve a higher return on equity, long-term. It signed a letter of intent to establish an equity joint-venture with Suzhou Industrial Estate Jia An Investment Company entitled Ji Hui Long (Suzhou) Investment Company Limited in October 2014 to invest in Chinese companies with growth potential. The application is still under progress. The total investment amount and registered capital will be US$30 million in which CDW has 25% equity interest, i.e. US$7.5 million. We have also invested in a number of other businesses whose diversity and scalability are encouraging. These investments are relatively small and are into businesses at the initial stage of development. We look forward to sharing more details about these ventures as they gear up.

100M market cap company putting 10M of cash into a venture capital fund. Will be interesting to see the startups they invest in..

[BlueKelah]

13 Mar 2015 05:54:14 PM CDW HOLDING LIMITED CDW HOLDING LIMITED Share Consolidation::Mandatory

2 old shares become 1 new share.

[GFG]

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.

1. Yes, there are no more options outstanding. I too, think the options are fair as the exercise price is approximately at the market price when they were given in 2008.
However, the company recently called for a new share purchase mandate again. The shares issued, Treasury shares outstanding, and the total share capital (shares issued + treasury shares) in the past 3 yrs are:
2011 2012 2013
Shares issued 483,048,221 459,842,221 474,362,221
Treasury shares 21,306,000 44,512,000 29,992,000
Total share capital 504,354,221 504,354,221 504,354,221

As you can see, the treasury shares fluctuate substantially. This is because the company does share buy backs (a lot of buybacks were done at approximately $0.07-0.1 in 2012), then uses the treasury shares when the options are exercised.
Nothing wrong with that, but it does mean that future dilution cannot be ruled out. With the recent share repurchase mandate, I think they are planning on issuing options again.
To be conservative, I tend to use the total number of shares when calculating NAV as this is constantly 504,354,221. As long as the treasury shares are not cancelled, I include them in my calculations, although admittedly, this is not normal practice. I do so as the company has a record of using the treasury shares as such.

2. The future earning power of the company, IMO, is the major question mark. As noted in AR2013, the major customer has cut orders drastically. The management themselves admit that any improvement in earnings from the LCD backlights division is unlikely to cover the drop in earnings from the parts and accessories division.
Also, in 2013, 8 million units of backlights are manufactured for smartphones, while 32 million units are for the gamesets, digital cameras etc.
As management rightly and honestly pointed out, the smartphones will likely see some resilience or even increase in orders, but the 32million units have been decreasing over the years. Gamesets and digital cameras are just getting replaced by smartphones.
This for me, is the biggest worry.
Backlights division barely matched 2012 results only because a client made additional orders in the 2H.
What happens in 2014?

If backlights do poorly, parts and accessories is ALREADY doing very poorly in 2013, and the office automation, although showing improvement, is still negative and in any case, is insignificant, then the results for 2014 may be very ugly indeed.

3) The financial figures you quoted doesn't take into account the 2 extraordinary items:
- Gain on bargain purchase of USD 2mil
- Payout from the disposal of CD Suzhou. This sum is parked under "other operating income". I don't think theres a breakdown of how much exactly, but it should be the bulk of the $4mil or so as the other components of "other operating income" is interest income, which is not large.
So I would take into account that $6mil of the profit is "extraordinary"
That means a NP of $5.3mil only! As opposed to $11.3mil currently.

The redeeming factor is they are poised to receive the last instalment from the disposal of CD Suzhou in 2014, which is about SGD $5.4mil, or USD $4.312mil. In other words, there will be a substantial "Extraordinary item" for 2014 as well to prop up earnings.

Overall, I think the markets are too fixated on the high dividend yield. Remember each time u receive dividends, the "value" of the company drops as cash is used to payout.

I will stay on the sidelines and wait for it to dip to closer to $0.11-$0.12 range before reassessing again.
(Yes, I know that is very substantially lower than NAV but I feel a much larger MOS is required considering the variables, and the near certainty that 2014 is going to be a tougher year for the company than 2013)
Any suggestions of this company being worth $0.2-0.29 based on CURRENT VALUATIONS, imo, is way off the mark.
(There's an earlier link where someone did a very simple analysis of the book value alone to derive that figure)

Interesting exercise to do... let me revisit my thoughts posted previously

1) Looks like I guessed correctly here. There are now 19,000,000 options granted currently with a low exercise price. All are practically "in-the-money" and thus dilutive. As mentioned earlier, I'd stick by my stand to use the total number of shares including treasury.
This is constant at 504,354,221 (for now)
The share consolidation (2 for 1) will likely go through
2) This is where there's a slight surprise. While I was expecting a drop, and it did come true, the drop has been less drastic than expected.
Backlight units revenue from US 121.5mil in FY13 to 100.2mil in FY14.
Make no mistake about it though, the results are still poor. Just not that the drop has not been as drastic as imagined.
3) "The redeeming factor is they are poised to receive the last instalment from the disposal of CD Suzhou in 2014, which is about SGD $5.4mil, or USD $4.312mil. In other words, there will be a substantial "Extraordinary item" for 2014 as well to prop up earnings."

This is where I made a mistake. There's no extraordinary item for the earnings as that's already been recognised. Rather, the 4.3 mil shows up in cashflow.

Updated positives:
- I view the acquisition of 25% stake in Pengfu very positively. Management has indicated several times that the supply of components for the LCD was a limiting factor. Glad to see they have acted on it. This acquisition (although not a bargain price) has synergy as the production capacity will be increased from 1 mil to 2 mil / mth. Most importantly, Pengfu is OBLIGED to fill the orders from CDW. This allows CDW to both benefit by moving downstream (Taking a stake in their supplier), as well as secure the required light guide panels.
- Major client (possibly Sony) now accounts for 73.2% of revenue. decreased slightly
- CDW's capex has constantly been low. >3mil per annum. Indicating that there's little need for new machinery etc. Using a relatively fixed asset base to expand earnings is always a good thing.

Negatives:
- Despite the positives, the environment is no doubt still going to be challenging. The wage and previously low operating cost environment within china is likely to gradually keep changing.
- The JV formed (25% stake) to invest in "high growth PRC companies" is an unknown. Not sure if management can prove astute in such investments. I did send in an enquiry and was heartened to receive a reply indicating that these investments should ideally be in complementary companies that they'd understand. So I am guessing potential suppliers of CDW would be a good place to start.

<vested - small stake>

[BlueKelah]

PlayStation and xbox just got go ahead to sell in China market after many years ban, this means possible growth in handheld gaming for sony as well as nintendo (Nvidia tablet based on google play wont be in china market as google is not operating there as far as i know). There was a delay for the Jan launch date but seems it will launch this month successfully.

Given that China market is gonna be quite big, with rich chinese buying not only PS4 but the PS Vita to use with remote play and as second controller, very likely an influx of orders and a good year ahead for Sony and CDW. Thus CDW could be ramping up for a surge in orders with their new capacity investments.. Suspect the new investment fund may be to secure companies producing parts to Sony to allow for a steady flow of parts for the likely surge in PS4 manufacturing.

Should get a confirmation next quarter report

[GFG]

PlayStation and xbox just got go ahead to sell in China market after many years ban, this means possible growth in handheld gaming for sony as well as nintendo (Nvidia tablet based on google play wont be in china market as google is not operating there as far as i know). There was a delay for the Jan launch date but seems it will launch this month successfully.

Given that China market is gonna be quite big, with rich chinese buying not only PS4 but the PS Vita to use with remote play and as second controller, very likely an influx of orders and a good year ahead for Sony and CDW. Thus CDW could be ramping up for a surge in orders with their new capacity investments.. Suspect the new investment fund may be to secure companies producing parts to Sony to allow for a steady flow of parts for the likely surge in PS4 manufacturing.

Should get a confirmation next quarter report

Thanks for pointing this out... but a quick google search showed that the ban was actually lifted >1yr ago. (Is this correct?) So I don't think there'll be any sudden big demand coming on from PS and xbox
Also, as management has rightly pointed out, the demand for PS and xbox has been poor because of better smartphones with better games.
Let see what the next quarterly report says

[BlueKelah]

Ban was lifted early last year but Xbox ONE was only launched late last september and only had 100k units sold for launch and pre-order, compared to 30k units for their Japan launch. Not very popular due to expensive console/accessories and games but is available in many cities and shops.

PS4 is about to launch and it has taken long time as apparently lotsa red-tape for launching a console in China. They planning on launching in the F.T.Z. first.

PS4 is likely to do better than XboX in China. However, most chinese gamers play free games, with those who can afford it paying for the in-game purchases. Gaming in China is still mainly multiplayer PC games based (70%) with browser and mobile gaming about equal, 15% each. Total gaming market was worth about RMB30billion+(figures from last year) and expected to continue growth. So there is definitely a wall to climb for console gaming. But there are also a lot of wealthy chinese who will be contributing their parents $$ to the console market and handheld market.

Despite not much growth, CDW still has very very high net cash value(80% Mcap) despite the 30% rise in share price since last year, some discount to NAV still and high but sustainable div yield.

-v-

[GFG]

Ban was lifted early last year but Xbox ONE was only launched late last september and only had 100k units sold for launch and pre-order, compared to 30k units for their Japan launch. Not very popular due to expensive console/accessories and games but is available in many cities and shops.

PS4 is about to launch and it has taken long time as apparently lotsa red-tape for launching a console in China. They planning on launching in the F.T.Z. first.

PS4 is likely to do better than XboX in China. However, most chinese gamers play free games, with those who can afford it paying for the in-game purchases. Gaming in China is still mainly multiplayer PC games based (70%) with browser and mobile gaming about equal, 15% each. Total gaming market was worth about RMB30billion+(figures from last year) and expected to continue growth. So there is definitely a wall to climb for console gaming. But there are also a lot of wealthy chinese who will be contributing their parents $$ to the console market and handheld market.

Despite not much growth, CDW still has very very high net cash value(80% Mcap) despite the 30% rise in share price since last year, some discount to NAV still and high but sustainable div yield.

-v-

Thanks for sharing this new information that I'm previously not aware of.
Management has stated that they are focussing on smartphone market though, so IMHO, the game console segment may not be a major contributor going ahead.
I do view the Pengfu deal very positively though. It shows management are taking proactive steps to solve problems (supply issues)
Am expecting them to do better in FY15 than in FY14

[BlueKelah]

Hopefully they can secure orders from other smartphone companies. It seems starting this year sony is looking to either sell off or slim down their smartphone division. Their six monthly release of xperia line will become a yearly release now. Good move by sony as the six monthly.release was just ridiculous. However this might impact cdw business, though hard to say since they were constrained by lack of parts which means orders are flowing in.

[GFG]

Hopefully they can secure orders from other smartphone companies. It seems starting this year sony is looking to either sell off or slim down their smartphone division. Their six monthly release of xperia line will become a yearly release now. Good move by sony as the six monthly.release was just ridiculous. However this might impact cdw business, though hard to say since they were constrained by lack of parts which means orders are flowing in.

Yes. Not only that, Sony has already cut their head count in their smartphone division in China. That's the major negative for CDW
I do think management is trying to diversify and supply to other clients to reduce concentration risk though