I don't think this concern is valid.
You wrote:Deswell has a new risk you might not have
considered. China will not devaluate its currency. The
currency of its neighbors have devaluated up to 50% in
some cases. This means Deswell's products will be more
expensive than those manufactured from the other Asian
countries. What's to keep American and the Japanese
customer of components from switching to a lower cost
provider?
Ask yourself "Why have the other Asian countries had to devalue their currencies?" I believe one of the main reasons was because they had to, in order compete with China. New investments are being funneled into China instead of the other Asian countries. This in turn puts pressure on the local Asian currencies (there is a smaller stream of hard currencies being converted into local currencies). Add to this the poor business practices of many banks and companies in the other Asian countries (holding too much debt, real estate bubbles) and you get the 'Asian flu'.
The labor costs in China are still lower than Thailand, Phillipines, Indonesia, and much lower than Korea, Thailand, Taiwan, and much, much lower than Singapore and Japan. There is no reason to believe, as you assert, that "This means Deswell's products will be more expensive than those manufactured from the other Asian countries." American, Japanese, and Europeans are buying products from Deswell and their customers instead of buying from these other higher cost providers.
But Deswell really has a limited cost advantage. The labor costs are unlikely to be more than 10% of the cost of their products (components). But China also has a low tax rate and generous investment credits. This all adds up to a boom time on the mainland, and trouble for the other countries in the region.
So here we can own a piece of a growing company located in a low cost country, strategically in one of the best businesses(electronics) for future growth prospects in that country's huge potential market, and with a strong export market now, and that has an extremely strong balance sheet and sharp management. Looks good to me. Just give the market time to get over the Asian flu, and this stock will soar.
Paul |
