Valuetronics Holdings

[NTL]

Theoretically, that is correct but the truth is we will never be able to gain control over management. The ED definitely have a better look into the company's books than us. The sale is a red flag but 4Q is still worth the wait. I wouldn't bet on anything after that. On normalised market conditions, it is not worth paying for an OEM earnings growth.

Hi dzwm87,

Can you kindly elaborate on your last statement, "On normalised market conditions, it is not worth paying for an OEM earnings growth."? So I can understand the OEM market more?

Thanks in advanced.

[dzwm87]

"On normalised market conditions, it is not worth paying for an OEM earnings growth."

OEM business is tough. Your customer squeeze you for margins while you are vulnerable to all kinds of cost pressure which means the math is always fighting against you. Historical net margin is also not relevant because labor cost (as a % of sales) is always increasing. It is hard to make a call on it. So you wouldn't want to pay for growth unless there is a huge margin of safety.

On Valuetronics, their historical mean has always been around 6x earnings for donkey years. You will need a strong conviction if you think fair is at 10x or 12x. Most OEM players trade at single digits P/E. So anything above it, you are somewhat paying for growth and I am not comfortable. The reason why it was attractive is because of the one-cost license disposal cost in FY2013. Strip that off, it was around 3x core earnings last year. IMO, it's only a one-year play and not meant for a long-term holding. 4Q14 will be critical and it may not be so easy because on a base comparison, 4Q13 already had recovered slightly.

And the sale from ED Hung Kai Wing is a strong signal. He oversees the entire manufacturing operations of the Group and he should know where the business is heading. If you strip out cash, valuations do look compelling but you also need to make a call on future cash burn rate. Don't forget, the recent cash build up was due to a huge spike in payables. It has to be paid up eventually. I don't think it is an improvement in credit terms.

Bottom line is do you not think the ED could also theoretically "strip" cash out and value the business? If it's so attractive, why did he sell? Yes, it could boil down to other non-fundamental reasons but this company doesn't have a good track record. We should remember back in 2012/13 that the directors also sold right at the peak.

My 2 cents opinion is I don't think this time is any different.

[NTL]

Hi dzwm87,

Thank you for your explanation.

Lets watch the upcoming quarterly announcement and see where this company is going.

[GFG]

"On normalised market conditions, it is not worth paying for an OEM earnings growth."

OEM business is tough. Your customer squeeze you for margins while you are vulnerable to all kinds of cost pressure which means the math is always fighting against you. Historical net margin is also not relevant because labor cost (as a % of sales) is always increasing. It is hard to make a call on it. So you wouldn't want to pay for growth unless there is a huge margin of safety.

On Valuetronics, their historical mean has always been around 6x earnings for donkey years. You will need a strong conviction if you think fair is at 10x or 12x. Most OEM players trade at single digits P/E. So anything above it, you are somewhat paying for growth and I am not comfortable. The reason why it was attractive is because of the one-cost license disposal cost in FY2013. Strip that off, it was around 3x core earnings last year. IMO, it's only a one-year play and not meant for a long-term holding. 4Q14 will be critical and it may not be so easy because on a base comparison, 4Q13 already had recovered slightly.

And the sale from ED Hung Kai Wing is a strong signal. He oversees the entire manufacturing operations of the Group and he should know where the business is heading. If you strip out cash, valuations do look compelling but you also need to make a call on future cash burn rate. Don't forget, the recent cash build up was due to a huge spike in payables. It has to be paid up eventually. I don't think it is an improvement in credit terms.

Bottom line is do you not think the ED could also theoretically "strip" cash out and value the business? If it's so attractive, why did he sell? Yes, it could boil down to other non-fundamental reasons but this company doesn't have a good track record. We should remember back in 2012/13 that the directors also sold right at the peak.

My 2 cents opinion is I don't think this time is any different.

Yes, OEM business is tough, and most manufacturers have single PERs, and in fact, usually even closer to PE 5.
The main prob is OEMs are like commodities. They produce based on the requirements of their clients.
Which is why when I first invested, I wrote to their IR to clarify certain points:
The biggest 5 customers of valuetronics have been with them for > 7 yrs
They have, to a certain degree, some retaining power and some pricing power. A large part of which, I believe, is because they do ODM as well
They work with clients to design the products.
And they include the delivery as well
ODMs are more protected as it involves a working relationship
It is not easy to just pack up and work with another manufacturer if your current one has substantial input into your product designs
In addition, they would incur relocation costs as valuetronics customises their factory space for their clients
Let's see how the 4Q results go
I believe the sale by the ED doesn't mean the results are not satisfactory

[GFG]

"On normalised market conditions, it is not worth paying for an OEM earnings growth."

OEM business is tough. Your customer squeeze you for margins while you are vulnerable to all kinds of cost pressure which means the math is always fighting against you. Historical net margin is also not relevant because labor cost (as a % of sales) is always increasing. It is hard to make a call on it. So you wouldn't want to pay for growth unless there is a huge margin of safety.

On Valuetronics, their historical mean has always been around 6x earnings for donkey years. You will need a strong conviction if you think fair is at 10x or 12x. Most OEM players trade at single digits P/E. So anything above it, you are somewhat paying for growth and I am not comfortable. The reason why it was attractive is because of the one-cost license disposal cost in FY2013. Strip that off, it was around 3x core earnings last year. IMO, it's only a one-year play and not meant for a long-term holding. 4Q14 will be critical and it may not be so easy because on a base comparison, 4Q13 already had recovered slightly.

And the sale from ED Hung Kai Wing is a strong signal. He oversees the entire manufacturing operations of the Group and he should know where the business is heading. If you strip out cash, valuations do look compelling but you also need to make a call on future cash burn rate. Don't forget, the recent cash build up was due to a huge spike in payables. It has to be paid up eventually. I don't think it is an improvement in credit terms.

Bottom line is do you not think the ED could also theoretically "strip" cash out and value the business? If it's so attractive, why did he sell? Yes, it could boil down to other non-fundamental reasons but this company doesn't have a good track record. We should remember back in 2012/13 that the directors also sold right at the peak.

My 2 cents opinion is I don't think this time is any different.

Yes, OEM business is tough, and most manufacturers have single PERs, and in fact, usually even closer to PE 5.
The main prob is OEMs are like commodities. They produce based on the requirements of their clients.
Which is why when I first invested, I wrote to their IR to clarify certain points:
The biggest 5 customers of valuetronics have been with them for > 7 yrs
They have, to a certain degree, some retaining power and some pricing power. A large part of which, I believe, is because they do ODM as well
They work with clients to design the products.
And they include the delivery as well
ODMs are more protected as it involves a working relationship
It is not easy to just pack up and work with another manufacturer if your current one has substantial input into your product designs
In addition, they would incur relocation costs as valuetronics customises their factory space for their clients
Let's see how the 4Q results go
I believe the sale by the ED doesn't mean the results are not satisfactory

Share price moved up very strongly today
$0.365 now
Think the upcoming final quarter results should be very strong with a substantial dividend payout
Whoever bought early and held on would have profited handsomely

<vested>

[Nick]

19 May 2014
Valuetronics
Too much Value to ignore. PE ex cash of 4.0x.
SG | MANUFACTURING | ELECTRONICS

Rating:
Trading Buy
Initiate with Trading Buy
TP: 43.0 cents

Company Background

 Valuetronics provides OEM and ODM services via 2 business segments of Consumer Electronics Products (“CE”), and Industrial and Commercial Electronics Products (“ICE”). They have more than 20 years of operations with revenues crossing HK$2 Billion since 2012.

 Established in 1992, Valuetronics has maintained relevance by growing from an integrated EMS provider, towards a premier design and manufacturing partner for the world’s leading brands in the consumer, industrial and commercial electronics sectors. This relevance manifests itself in ~27% and 18% revenue CAGR in both CE and ICE ending FY13, as well as having more than 80% of repeat customers.

 They have grown their product offering from OEM (GSM Wireless Telephone, Cold Chain Temperature Monitor, Thermal Label Printer) and ODM (Baby Monitor, Alcohol Testor, Digitally Controlled Home Appliances) in 2007, to include LED energy saving luminaries and shavers (CE) and transaction printers, GPS, medical equipment and access card readers for (ICE) in 2013.

 CE segment makes up ~70% all revenues and has lower operating profit before tax (OPBT) of ~10%. ICE segment is at present ~30% all revenues and growing, with a higher OPBT of ~17%.

 At present, LED lamps make up ~40% of all revenues, with shavers ~20% of all revenue.

Opportunities

 CE segment provides an earnings base, albeit with cycle volatility, as the whole lamp market will pick up with 1) global recovery (single digit growth); as well as 2) the burgeoning LED lamps revolution product cycle itself. The LED lamp cycle continues to take up market share within the slowly growing lighting market with accelerated sales growth as they continue to render incandescent lamps obsolete – implying a conservative double digit sales growth rate as prices decrease attracting mainstream take up. It is estimated the global monetary value of the LED retrofit market was EUR 190m in 2011 and will grow to EUR 905m by 2016.

 Their efforts to grow their higher margin ICE segment has been encouraging, as evidenced by 2 key ICE customers closing their production in US and China respectively, and transferring all their production to Valuetronic’s facility.

[NTL]

19 May 2014
Valuetronics
Too much Value to ignore. PE ex cash of 4.0x.
SG | MANUFACTURING | ELECTRONICS

Rating:
Trading Buy
Initiate with Trading Buy
TP: 43.0 cents

Company Background

 Valuetronics provides OEM and ODM services via 2 business segments of Consumer Electronics Products (“CE”), and Industrial and Commercial Electronics Products (“ICE”). They have more than 20 years of operations with revenues crossing HK$2 Billion since 2012.

 Established in 1992, Valuetronics has maintained relevance by growing from an integrated EMS provider, towards a premier design and manufacturing partner for the world’s leading brands in the consumer, industrial and commercial electronics sectors. This relevance manifests itself in ~27% and 18% revenue CAGR in both CE and ICE ending FY13, as well as having more than 80% of repeat customers.

 They have grown their product offering from OEM (GSM Wireless Telephone, Cold Chain Temperature Monitor, Thermal Label Printer) and ODM (Baby Monitor, Alcohol Testor, Digitally Controlled Home Appliances) in 2007, to include LED energy saving luminaries and shavers (CE) and transaction printers, GPS, medical equipment and access card readers for (ICE) in 2013.

 CE segment makes up ~70% all revenues and has lower operating profit before tax (OPBT) of ~10%. ICE segment is at present ~30% all revenues and growing, with a higher OPBT of ~17%.

 At present, LED lamps make up ~40% of all revenues, with shavers ~20% of all revenue.

Opportunities

 CE segment provides an earnings base, albeit with cycle volatility, as the whole lamp market will pick up with 1) global recovery (single digit growth); as well as 2) the burgeoning LED lamps revolution product cycle itself. The LED lamp cycle continues to take up market share within the slowly growing lighting market with accelerated sales growth as they continue to render incandescent lamps obsolete – implying a conservative double digit sales growth rate as prices decrease attracting mainstream take up. It is estimated the global monetary value of the LED retrofit market was EUR 190m in 2011 and will grow to EUR 905m by 2016.

 Their efforts to grow their higher margin ICE segment has been encouraging, as evidenced by 2 key ICE customers closing their production in US and China respectively, and transferring all their production to Valuetronic’s facility.

Hey, who wrote this article? He/She reached the same target price as me in post #226!

[Nick]

19 May 2014
Valuetronics
Too much Value to ignore. PE ex cash of 4.0x.
SG | MANUFACTURING | ELECTRONICS

Rating:
Trading Buy
Initiate with Trading Buy
TP: 43.0 cents

Company Background

 Valuetronics provides OEM and ODM services via 2 business segments of Consumer Electronics Products (“CE”), and Industrial and Commercial Electronics Products (“ICE”). They have more than 20 years of operations with revenues crossing HK$2 Billion since 2012.

 Established in 1992, Valuetronics has maintained relevance by growing from an integrated EMS provider, towards a premier design and manufacturing partner for the world’s leading brands in the consumer, industrial and commercial electronics sectors. This relevance manifests itself in ~27% and 18% revenue CAGR in both CE and ICE ending FY13, as well as having more than 80% of repeat customers.

 They have grown their product offering from OEM (GSM Wireless Telephone, Cold Chain Temperature Monitor, Thermal Label Printer) and ODM (Baby Monitor, Alcohol Testor, Digitally Controlled Home Appliances) in 2007, to include LED energy saving luminaries and shavers (CE) and transaction printers, GPS, medical equipment and access card readers for (ICE) in 2013.

 CE segment makes up ~70% all revenues and has lower operating profit before tax (OPBT) of ~10%. ICE segment is at present ~30% all revenues and growing, with a higher OPBT of ~17%.

 At present, LED lamps make up ~40% of all revenues, with shavers ~20% of all revenue.

Opportunities

 CE segment provides an earnings base, albeit with cycle volatility, as the whole lamp market will pick up with 1) global recovery (single digit growth); as well as 2) the burgeoning LED lamps revolution product cycle itself. The LED lamp cycle continues to take up market share within the slowly growing lighting market with accelerated sales growth as they continue to render incandescent lamps obsolete – implying a conservative double digit sales growth rate as prices decrease attracting mainstream take up. It is estimated the global monetary value of the LED retrofit market was EUR 190m in 2011 and will grow to EUR 905m by 2016.

 Their efforts to grow their higher margin ICE segment has been encouraging, as evidenced by 2 key ICE customers closing their production in US and China respectively, and transferring all their production to Valuetronic’s facility.

Hey, who wrote this article? He/She reached the same target price as me in post #226!

Phillip Capital

[NTL]

19 May 2014
Valuetronics
Too much Value to ignore. PE ex cash of 4.0x.
SG | MANUFACTURING | ELECTRONICS

Rating:
Trading Buy
Initiate with Trading Buy
TP: 43.0 cents

Company Background

 Valuetronics provides OEM and ODM services via 2 business segments of Consumer Electronics Products (“CE”), and Industrial and Commercial Electronics Products (“ICE”). They have more than 20 years of operations with revenues crossing HK$2 Billion since 2012.

 Established in 1992, Valuetronics has maintained relevance by growing from an integrated EMS provider, towards a premier design and manufacturing partner for the world’s leading brands in the consumer, industrial and commercial electronics sectors. This relevance manifests itself in ~27% and 18% revenue CAGR in both CE and ICE ending FY13, as well as having more than 80% of repeat customers.

 They have grown their product offering from OEM (GSM Wireless Telephone, Cold Chain Temperature Monitor, Thermal Label Printer) and ODM (Baby Monitor, Alcohol Testor, Digitally Controlled Home Appliances) in 2007, to include LED energy saving luminaries and shavers (CE) and transaction printers, GPS, medical equipment and access card readers for (ICE) in 2013.

 CE segment makes up ~70% all revenues and has lower operating profit before tax (OPBT) of ~10%. ICE segment is at present ~30% all revenues and growing, with a higher OPBT of ~17%.

 At present, LED lamps make up ~40% of all revenues, with shavers ~20% of all revenue.

Opportunities

 CE segment provides an earnings base, albeit with cycle volatility, as the whole lamp market will pick up with 1) global recovery (single digit growth); as well as 2) the burgeoning LED lamps revolution product cycle itself. The LED lamp cycle continues to take up market share within the slowly growing lighting market with accelerated sales growth as they continue to render incandescent lamps obsolete – implying a conservative double digit sales growth rate as prices decrease attracting mainstream take up. It is estimated the global monetary value of the LED retrofit market was EUR 190m in 2011 and will grow to EUR 905m by 2016.

 Their efforts to grow their higher margin ICE segment has been encouraging, as evidenced by 2 key ICE customers closing their production in US and China respectively, and transferring all their production to Valuetronic’s facility.

Hey, who wrote this article? He/She reached the same target price as me in post #226!

Phillip Capital

Thanks.

Philips and OCBC were the 2 pioneers in researching and writing about Valuetronics. OCBC had terminate their research due to resource issue. But also thanks to OCBC, they made me take notice of this company.

[newborn1000]

I am invested too..........but is it time me to offload?? =D

Probably not, just being ironic