agm_logoTime & date: 10 am, 22 July 2014.
Venue: The Ritz-Carlton,
7, Raffles Avenue.

I ESTIMATED 80-100 shareholders attended the AGM, which was preceded by a Powerpoint presentation by financial controller Joseph Lui on the business segments of Valuetronics and its financial performance.

I can only say that more companies should do such a presentation prior to the start of their AGMs.

Hong Kong-based Valuetronics -- whose stock price has gained more than 100% since the start of the year -- reports its business in two segments, one of which is the Consumer Electronics (CE) segment.

valuetronics_TseChongHing7.14Valuetronics Chairman and MD Tse Chong Hing joined the Group in Nov 1996 as the Assistant to the then MD. He owns 68.4 m shares of the company, or 18.53% stake, the largest single stake. Photo: annual reportChairman and MD Tse Chong Hing pointed out that this segment has higher production volume and "naturally, the customers won't give a generous profit margin to the manufacturers".

The other segment is the one with higher profit margin and higher return on equity --- the Industrial and Commercial Electronics (ICE) segment where Valuetronics provides Electronics Manufacturing Services (EMS) for non-consumer products such as high-precision GPS products used by farmers.

The ICE segment commands better margin because of the "high mix low volume" nature of the production, and the quality expectations are higher, he said.

In addition, Valuetronics' design and development contribution to the product is valued by customers. 

These are largely customers in North America with lower sales revenue a year and who focus on their core capabilities, outsourcing the manufacturing to Valuetronics, added Mr Tse, who was responding to a shareholder seeking greater clarity on why the ICE segment had a higher profit margin.

In FY2014, the CE segment recorded profit of HK$160.6 million on HK$1.65 billion revenue. The ICE segment, in comparison reported HK$150.7 million and HK$779.9 million, respectively.

The following are other highlights of the Q&A session, which lasted for about an hour during which questions were raised from a wide spread of shareholders. Valuetronics chairman Tse Chong Hing took them all in his stride.

Q: Is the LED business your main revenue contributor and what's your take on this going forward?

Philips_LED7.14The Philips Group accounts for more than 50% of Valuetronics revenue. For Philips, Valuetronics manufactures LED light bulbs and PCBA for their shavers, toothbrushes and hair trimmers.Mr Tse: For competitive reasons, I can't tell you the contribution of each customer. The big picture is, the growth of the LED business is tied to the trend of energy saving and reduction of carbon footprint.

Q: Comparing FY2012 and FY2014 performance: The revenue for CE was similar (HK$1.68 billion vs HK$1.65 billion) while the revenue for ICE has risen in 2014 (HK$605 million vs HK$780 million). However, the gross profit margin for the group has dipped from 14.0% to 13.4%. Why?

Mr Tse: At that time, the LED products were still new in the market. Our customer and we the manufacturer were able to command a better margin than today. The products are moving towards the consumer mass market.  

Q: The net profit from continuing operations in FY2012 (HK$160 million) was higher than in FY2014 (HK$148 million) but the share prices in FY2012 and today are very different. This could be due to the market expectations of  the business performance. Are there opportunities to grow our existing customers or are we going to acquire more new customers?

Mr Tse: Remember in FY2012, we still had our licensing business and the market gave a discount to our counter. Naturally, to grow a company, business development is crucial. There are two aspects -- grow with the existing customers with new products, new projects. Secondly, new customer acquisition. We will have new customers in FY2015. 

Mr Chow Kok Kee, Lead Independent Director: In FY2012, there were many S-chip issues and some people saw us an S-chip. We have been trying to educate the market that we are not an S-chip although our operations are in China. 

Q: I am happy that Valuetronics has come out with a dividend policy of paying 30-50% of its earnings as dividends. It's quite substantial, please consider splitting it into payments twice a year?

Valuetronics_ICE7.14Examples of industrial and commercial electronics (ICE) products manufactured by Valuetronics. Mr Tse: I will bring the idea to the Board for consideration.

Q: The company's cash holding (HK$477.9 million, as at end-March 2014) is huge -- almost 50% of the recent market cap. You can buy back shares or you can do capital distribution. Shareholders are asking why is there so much cash sitting idly and there's a suspicion over where it's real or not real.

Mr Tse: There have been companies that have mismanaged their cash so, to send a positive signal to our shareholders, there are extra processes in our audit work.

As for the high level of cash, I remember two years after our listing, we already had about HK$200 million and analysts asked how we would handle our cash. It's still the same.

Apart from working capital, the cash is a very important tool for us when we approach potential customers because it reflects the financial health of the company.

In fact, last year, for two of our new customers -- our strong balance sheet and cash position were important considerations for them when they moved their production over to us after closing their factories. These two ICE customers contributed significantly to our growth last year. 

We have to continue to grow and need cash to support our growth and reinforce the confidence of customers in us. We have a track record on how we manage cash, and our integrity.

Mr Chow Kok Kee: Valuetronics is bad news for bankers -- we don't borrow money from them.

We are not a REIT, where we have cash we distribute it back to shareholders. Manufacturing is a different business. In times of trouble, we know where the bankers would be. The cash is a competitive advantage for us. But make sure it's properly managed and not too excessive.

Q: There's no mention of your order backlog in the annual report. Is it possible to tell us?

Mr Tse: We don't include that information in the annual unlike capital equipment manufacturers whose order lead time is very long. In general, in the EMS sector, firm orders are usually 1 month all the way to 3 months. 

Value_chart7.14Valuetronics closed at 55.5 cents and has a market cap of S$204.78 million.
Trailing PE: 10.67. Chart: Yahoo Finance.

Recent story: VALUETRONICS: Visit reinforces AmFraser's 'buy' call, 69-c target price


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#1 WXYZ 2014-07-27 18:02
@ 10.67 PE, doesn't Valuetronics look fairly valued? If 1QFY15 results next month shows single-digit growth, I wouldn't be surprised that the upside for the shares is no more than 20% from here (ie 55.5 cents currently --> 66.6 cents). `

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