Techcomp (Holdings)

[RBM]

I note that yesterday Techcomp confirmed and firmed up their plans to pursue a dual listing in Hong Kong. This followed some earlier utterings on this subject in March 2011, if I recall correctly.

What struck me this morning, 30th November, is the > 30% (thirty percent) increase in Techcomp's Singapore share price. Although volumes are small, bid prices and volumes are also significantly up. This in an overral flat market.

May be its another dumb question from yours truly ............... but is a dual listing really worth so much on the share price? And does a Hong Kong listing really justify a much higher multiple than Singapore? What am I missing/overlooking?

Vested (so I'm not unhappy about this ........... but still down on my initial investment).

[Musicwhiz]

Hi RBM,

I've said my piece about dual listings on my blog, so pardon me if I sound like a stuck record.

To me, a dual listing is simply a method of either raising more money (through issuance of TDR, KDR or whatever DR) or to "gain more recognition" and to get a "wider base of investors". This essentially means raising the profile of the Company so that more people take notice of its merits (and flaws?) and hopefully accord it a higher valuation.

But ultimately, it boils down to the quality of the business, no? If a business is good, then it deserves to trade at a premium to competitors in the industry. If it is mediocre, then gravity will naturally pull it back to Earth.

For Techcomp, I don't know the Company well enough, so no comments.

[RBM]

Thanks (again) MW - I have just read your January 11th Blog piece on the subject. Good, interesting read (and you weren't ranting in my view!). I noted in particular the sentence " It is widely recognized and known (though never publicly acknowledged) that China companies in Singapore (“S-Shares”) trade at lower valuations than their counterparts in Hong Kong, Taiwan and even China." While Techcomp is not a "China Company", it has its main base and decision-making-leaders based in Hong Kong.

I am staggered by the increase in Techcomp's share price and the bid prices today - albeit in small traded volume - because Techcomp is no better a company today than it was yesterday.

Vested.

[Musicwhiz]

I am staggered by the increase in Techcomp's share price and the bid prices today - albeit in small traded volume - because Techcomp is no better a company today than it was yesterday.

Hi RBM,

Many thanks for visitng my blog and reading that piece - I hadn't realized it's almost a year since I wrote on the subject haha!

Interestingly, I read in an investment book (can't recall which though) that it's simply perceptions which shape market prices in the short-term, even though there is no material change in the company (short of a complete collapse of its factory in an earthquake or fire). But it is the weight (quality) of the business which determines the long-term value accorded to being a shareholder of the business.

Hence, if you realize that perceptions have changed, you can take advantage of the bullishness and sell to the optimists (assuming, of course, that it is your objective).

For myself, I made use of the positive perceptions accorded to China Fishery back in Jan 2010 when they announced their dual listing intentions to sell my entire stake. Their dual listing plans have since been scrapped.

[RBM]

With reference to the 30th November 2011 discussion that we had regarding Techcomp's Dual Listing .........

It is interesting to note that having dual-listed in Hong Kong in December 2011, Techcomp traded recently at HK$ 3.11 per share, or a tad more than S$ 0.50 (Fifty Singapore Cents) ............compared to a share price of S$ 0.40 (Forty Singapore Cents) on the Singapore SGX. This is NOT due to lack of liquidity of the counter on the SGX.

25% higher share price in Hongkers?? I wonder! Surely room for the Singapore share price to move up a tad?

Vested (in the Singapore listed shares of Techcomp)

[RBM]

Further to my posting of this morning, the attached article on Techcomp is taken from NextInsight........

http://www.nextinsight.net/index.php/sto...r-one-offs

I found it quite interesting to see how the company has grown its revenue stream over the years and how its P/E compares with other companies operating in the same business.

Vested

[RBM]

I refer to my two postings on this VB Techcomp-Dual-Listing thread of 3rd March 2012 - i.e. six days ago (or five trading sessions ago) - in the first of these two postings, I attempted to highlight the ~ 25% differential between the Hong Kong and Singapore share prices of Techcomp.

Over the last five SGX trading sessions, Techcomp's Singapore share price has risen by some 12.5%, i.e. from S$ 0.40 per share to S$ 0.45 per share - Techcomp emerged from the early week market "wobble" unscathed. My ego would really like for this Singapore share price enhancement to be seen by all as due to the radical closing of the differential between the HKEX and SGX share prices. However, I have to admit to the numbers and the reality - there is still a significant differential between the Singapore and Hong Kong share prices of this dual listed company.

The reality: At the close of today's HKEX trading session, Techcomp's Hong Kong share price closed at HK$ 3.19. This equates to ~ S$ 0.515 per share at the prevailing mid-S$:HK$-exchange rate. This is still ~ 14%-15% above today's Techcomp SGX S$ 0.450 closing price for shares that are supposed to rank equally. I remain of the opinion that this gap should close and I view this as an upside to the Techcomp share price on the SGX.

I am vested in Techcomp (the Singapore shares........ maybe I should have converted to Hong Kong units of the counter at the turn of the year, when such a possibility was offerred by Techcomp???!!). There are some decent pieces and narratives on Techcomp's background and progress on the NextInsight web-site and it would be wrong to plagiarise or repeat what is stated there. For some observers - including those who contribute to NextInsight - Techcomp has some appealing features.

But I can't help believing that the Hong Kong - Singapore "share-price-gap" has to close somewhat further.

Cyclone - It was my mistake to (trigger and) call this thread "Techcomp Dual Listing". Can it be changed to simply "Techcomp"?? I seem unable to do this - I'm inept at IT stuff. Thank you.

Vested

[Musicwhiz]

But I can't help believing that the Hong Kong - Singapore "share-price-gap" has to close somewhat further.

Cyclone - It was my mistake to (trigger and) call this thread "Techcomp Dual Listing". Can it be changed to simply "Techcomp"?? I seem unable to do this - I'm inept at IT stuff. Thank you.

Vested

Hi RBM,

I've changed the title of the thread, no worries about that; Moderators can do it too.

Had a quick look at Techcomp's latest FY 2011 results. I am a firm believer that a business' fundamentals would eventually drive its share price - as a business becomes more valuable the share price would naturally rise. As for the discrepancy between HK and SG, I would not dwell too much on it - if the busienss is improving and cash flows are increasing then the share price would eventually rise to reflect this.

Noted that Techcomp incurred dual listing fees for HK, which means that if stripped out, profit would be flattish. Any reasons for the dual listing? Was it just a share migration or to raise more funds?

Noted its Balance Sheet has deteriorated - cash has dropped quite a bit, loans have gone up, inventories are higher and trade receivables have also increased.

Cash Flow Statement shows -ve operating cash flows, though capex is very low. But most of the cash would come from Financing (Bank Loans).

What are your views on the business and its prospects? Would be interesting to hear from a shareholder. (I am not vested)

[RBM]

Thanks for your message MW ...........and moreover thanks for changing the title of this thread,

Firstly, I have tried to stand back a little and summarise my perspective of the strengths and not-so-strong points of Techcomp........ three of each............ I do not pretend that this is exhaustive.

Positives
++++++

+ve 1. Impressive, constantly improving track-record of bottom-line growth. For example, Techcomp's revenues have grown year-on-year every year for the last ten years. If correction is made for the costs of the second listing in Hong Kong and a divestment in FY 2010, actually FY 2011 would be Techcomp's record year for profit.

+ve 2. Compared to its peer companies (manufacturers of scientific and laboratory analystical instruments), Techcomp is trading on by far the lowest P/E ratio. I am using US companies such as Agilent, Mocon & Life Technologies when making this comparison - correcting for the HKEX listing costs, Techcomp's P/E, based on FY 2011 results is ~ 7.0, whereas its competitors have P/E's in the teens and twenties.

+ve 3. For holders of the Singapore shares - the potential for the Singapore share price to catch-up with the Hong Kong share price. I suppose it could be argued that for holders of the Hong Kong shares there is a risk that the HKEX Techcomp share price descends to the SGX Techcomp share price.

Negatives
------------

-ve 1. I am not convinced by the success of Techcomp's European acquisitions - both the track record so far and the future prospects from these purchases are concerns. And Techcomp's leadership keeps talking of more acquisitions. I would prefer that they focus on the growth markets of Asia Pacific and demonstrate that they can deliver on promises made at the time of acquisition.

-ve 2. The old chestnut of receivables - these are getting higher. Yes Techcomp was not immune to effects of the Japanese Tsunami - which is understandable - but the rising level of receivables associated with Techcomp's China business is a concern.

-ve 3. Gearing is currently in the mid 40's and borrowing seems on the up - with a particular jump upwards over the last year. And management seems comfortable with even higher levels of gearing than this.

Secondly, trying to answer your questions.............. which are in italics.................

Noted that Techcomp incurred dual listing fees for HK, which means that if stripped out, profit would be flattish. Any reasons for the dual listing? Was it just a share migration or to raise more funds?

Answer - When comparing FY 2011 with FY 2010 results, we should also factor in a 2010 divestment. FY 2011 was actually a darn good year, in my view, and I don't share the view that profitability was "flattish". The S$ 3.5 Million dual listing exercise was clearly one of share migration. But based on the belief that the Hong Shares would trade on a better multiple. And so far....... Techcomp's BoD has been proven correct! (and me incorrect!!).

What are your views on the business and its prospects? Would be interesting to hear from a shareholder

Techcomp seems to be one of NextInsight's most covered counters - worth reading. But I have tried to summarise how I view Techcomp in my +ve's and -ve's above. The two key reasons I decided to invest in Techcomp was a) my belief that they should be trading on a far higher profitability multiple (viz. competitor P/E ratios) and b) their track-record of year-on-year revenue growth.

Vested

[Musicwhiz]

Positives
++++++

+ve 1. Impressive, constantly improving track-record of bottom-line growth. For example, Techcomp's revenues have grown year-on-year every year for the last ten years. If correction is made for the costs of the second listing in Hong Kong and a divestment in FY 2010, actually FY 2011 would be Techcomp's record year for profit.

+ve 2. Compared to its peer companies (manufacturers of scientific and laboratory analystical instruments), Techcomp is trading on by far the lowest P/E ratio. I am using US companies such as Agilent, Mocon & Life Technologies when making this comparison - correcting for the HKEX listing costs, Techcomp's P/E, based on FY 2011 results is ~ 7.0, whereas its competitors have P/E's in the teens and twenties.

+ve 3. For holders of the Singapore shares - the potential for the Singapore share price to catch-up with the Hong Kong share price. I suppose it could be argued that for holders of the Hong Kong shares there is a risk that the HKEX Techcomp share price descends to the SGX Techcomp share price.

Negatives
------------

-ve 1. I am not convinced by the success of Techcomp's European acquisitions - both the track record so far and the future prospects from these purchases are concerns. And Techcomp's leadership keeps talking of more acquisitions. I would prefer that they focus on the growth markets of Asia Pacific and demonstrate that they can deliver on promises made at the time of acquisition.

-ve 2. The old chestnut of receivables - these are getting higher. Yes Techcomp was not immune to effects of the Japanese Tsunami - which is understandable - but the rising level of receivables associated with Techcomp's China business is a concern.

-ve 3. Gearing is currently in the mid 40's and borrowing seems on the up - with a particular jump upwards over the last year. And management seems comfortable with even higher levels of gearing than this.

Secondly, trying to answer your questions.............. which are in italics.................

Noted that Techcomp incurred dual listing fees for HK, which means that if stripped out, profit would be flattish. Any reasons for the dual listing? Was it just a share migration or to raise more funds?

Answer - When comparing FY 2011 with FY 2010 results, we should also factor in a 2010 divestment. FY 2011 was actually a darn good year, in my view, and I don't share the view that profitability was "flattish". The S$ 3.5 Million dual listing exercise was clearly one of share migration. But based on the belief that the Hong Shares would trade on a better multiple. And so far....... Techcomp's BoD has been proven correct! (and me incorrect!!).

What are your views on the business and its prospects? Would be interesting to hear from a shareholder

Techcomp seems to be one of NextInsight's most covered counters - worth reading. But I have tried to summarise how I view Techcomp in my +ve's and -ve's above. The two key reasons I decided to invest in Techcomp was a) my belief that they should be trading on a far higher profitability multiple (viz. competitor P/E ratios) and b) their track-record of year-on-year revenue growth.

Vested

Hi RBM, and thanks for your very detailed analysis broken down into pros and cons.

To address your points:-

Positives

Techcomp has grown revenues year-on-year for the last ten years, but how about bottom line, net margin and ROE? No doubt growing revenue is impressive, but for many companies growing top line is not always a difficult thing; it's more of how you manage the expenses and streamline the operations which would see profits rising and cash inflows increasing. I have not done a detailed analysis for Techcomp so at this stage I cannot comment; but just wondering if you know how their track record is with regards to growing net profit, gross/net margin and ROE (consistent?).

When comparing with peers, you also have to look at the size and scale of the competitors. If Techcomp is, say, a smaller player then it would trade at a discount to the PER of the larger competitors. One can also look at the revenues of the company to determine the market share of the Company with respect to competitors.

Negatives

With regards to acquisitions, I do concur that a Company should not be overly aggressive when it comes to M&A, otherwise it would be labelled as a serial acquiror, with very dim prospects for organically growing its own business. How exactly are their acquisitions faring and are they profitable and contributing to the bottom line? More importantly, did they pay a fair price for these companies? How does the acquisition of these companies gel or integrate with their core business? Any synergies to be expected and how are these being realized over time?

As for receivables, you can try computing days receivables for Techcomp to assess if there is indeed a deterioration in this aspect, and whether the cash conversion cycle has lengthened. Assuming their sales keep rising, there is always a chance that they are selling in advance to customers with more favourable credit terms, and then are slower in collecting the cash. As you said, this may become a serious (cash flow) problem in time to come.

It pays to look at their gearing and how much they are paying for their debt. No doubt debt is cheap now but if they screw up on an acquisition it could become very costly indeed.

And why does the Company need to dual list in HK just to justify "higher valuations"? To me, a good company should be a good company, whether it is trading on SGX or HKEX. In fact, if it is under-valued, all the better because this means shareholders can collect more with a margin of safety.

Oh yes, one last thing - have dividend payments been consistent over the last say 5 years? And what has their payout ratio been?

Thanks! Great to have this discussion.

P.S. - I won't pay too much attention to NextInsight's article, they have companies in their stable which they are promoting (aggressively). Best to look at the annual reports and numbers coming out directly from the Company; or speak to the CEO/CFO in order to ascertain business prospects.