Long post on Deswell's potential as I see it.
Reading the China and Hong Kong news, I've come to various conclusions. The Chinese government has virtually guaranteed Hong Kong will continue to operate as a separate entity. Some will say that this can change at any time, but I disagree. China is in negotiations with Taiwan for a unified China. They will do nothing to upset these negotiations nor will they do anything that would make international investors nervous. They realize the need for outside capital. They are passionate about a conversion to capitalism.
They will continue current tax benefits and if they see a weakening of the economy below a certain level, will provide additional tax stimulus. We must remember that the Chinese Government is receiving non-tax revenue from most businesses in the form of property rentals and labor supply. In most cases, this income exceeds the taxes. This is a very effective method of getting revenue that isn't dependent on company profits.
The yuan and $HK will continue to be supported because devaluing would result in further devaluing of other regional currencies.
Interbank interest rates in HK shot up to support the $HK and have now dropped back to 6.5-7%, but this has not improved the money supply. Asian banks, particularly those in Japan, have had to pull monies out of HK banks because of their own problems. US and Euro banks have pulled monies due to regional problems. The Chinese government has placed much stricter regulations on bank lending and are forcing the banks to eliminate non-performing loans. Companies in debt or needing to borrow will have problems while those flush with cash will have opportunities for acquisition.
Companies in Japan and the ASEAN countries are in trouble. Most of them had a high debt load before the 'crisis' hit. The banks are in trouble because of the currency devaluations. Assets pledged against loans have depreciated and the banks must tighten loan policies. The companies don't have the cash the banks will require and they can't sell assets for enough to cover the loans. Because of the currency devaluations and lower labor costs, companies would have an opportunity to increase exports, but won't be able to take advantage of the situation. (The lower labor costs do not provide a major advantage because devaluation does not apply to raw material costs)
Deswell is sitting in a perfect position. Over $30M-US liquidity, no debt, and a supportive government concerned about a weakening in the economy. They have unlimited potential with the combination of plastics, circuit boards, metal stamping, and electronic assembly. Their concentration on telecommunications is perfect because of huge projected growth of telecom in every region of the world but they have a diversified capability to expand into other areas if needed.
Deswell has been adding new customers and the list is now becoming large enough that they are no longer dependent on a few customers. It appears their biggest problem is getting more facility space and the delays in getting equipment to meet an increasing demand that has allowed them to maintain past high margins.
We may not see it this quarter, but I do expect to see an announcement of an acquisition or substantial expansion in the first six months of this year. We also should see a substantial increase in dividends.
We have often mentioned Namtai acquiring Deswell. I now think that Deswell should acquire majority ownership of Namtai to get access to Namtai's facilities and customer lists. I believe Deswell's management could put them to good use. They could buy with Namtai's cash.
Isn't that an interesting thought?
For what it's worth,
Ron |
