David,
Back in December, you predicted that the Asian Crisis was just beginning and would be around for at least 6 months. What do you say now? I read all of the International news plus the HK Standard and South China news daily and it's all bad.
Is there a bottom to this and are we near it?
I've been reading back thru the thread and finding some excellent discussions that were made back when we were doing so much research and analysis. For lack of something new to post, I'm offering a review of my findings in no particular order. It is impossible to give individual credit as so many contributed.
1. It has been pointed out that the 'crisis' would offer acquisition possibilities for Deswell. Mr. Lau said that they would be open to this, but they preferred to grow internally. It was brought up that Deswell might be able to buy some equipment at a bargain because of the currency devaluations.
2. Mr. Lau told both Mike and I in Nov. and Dec. that we could expect some very nice numbers and we should consider the low price a good buying opportunity. They reported $19M revs and .78 earnings. We reviewed each of the reports and comments made by Mr. Lau. In each of our calls, in each report issued, he has made statements related to operations and they have been later verified. If he says they have growth this Q, then IMO we can believe it.
3. Mr. Lau stated that a devaluation of the $HK or of the Rmb would have minimal effect on operations. I believe they constantly review this and keep the company in a position where this is true.
4. Option shares, Namtai shares, warrant shares, are all now included in dilution. There are no hidden shares. Insiders own slightly more than half. Any dilution from this point must come from options. I estimate the trading float around 1.5M shares (won't know the exact amount of the Fund holdings). Because of the small liquidity, we will have large price fluctuations. Funds have been jumping in and buying at prices up to 22.50. Insiders will maintain majority ownership!
5. The plastics sector is showing good growth, circuit boards being pressured, metal stamping growing. We should expect competitive pressures for Kwanasia, continued strength for Jetcrown and Kwanta.
6. The tax advantages Deswell has enjoyed will continue as China tries to increase exports. If anything they will get even more incentives until things stabilize.
7. Deswell has minimal competition in China. Each company makes certain products and works their own market niche. To compete in a market a company must get permission. China's objective is for companies to compete against companies in other countries, not against other companies in China.
7. Jetcrown buys resin from plants in Japan and South Korea with no contracts or commitments to any one supplier. Resin has been 40% of COGS. The weak yen and low oil prices will lower this cost. If they have fixed price sales contracts, they will have margin increases.
8. Wages are around 25% of COGS, most of it to highly skilled employees. The devalution of other currencies will be reflected in advantages for some competitors wage costs, but the percentage of COGS is so low that the advantage will be minimal.
9. Machinery for all 3 companies is modern, high tech, and highly efficient, requiring very little, but highly skilled labor. This provides them with very high quality output at low cost.
10. Customers seem to be very satisfied with Deswell as they receive repeat orders and new product orders. The customer list is small, but of good quality growing companies.
11. Each time inventories have shown an increase, revs followed. Inventories were up 20% the last Q.
12. Kwanasia's largest customer is Behringer, InterTel is both Jetcrown and Kwanasia, VTech is Jetcrown but has potential for Kwanasia, Mita is Jetcrown but is supposed to have placed a large order from Kwanasia, Namtai, Shakespeare, and the rest are primarily customers of Jetcrown.
13. Jetcrown is 100% owned, Kwanasia 50.1%, Kwanta a 69% owned subsidiary of Kwanasia = 34.5% Deswell. Jetcrown has the best margin and is the primary earnings source for Deswell due to minority interests in the subsidiaries.
My conclusion: Devaluation of the $HK or yuan is not a negative consideration as the assets are cash in $US and equipment. It would slightly lower costs of the rents, wages and other expenses. Fears of them losing sales to other Asian competitors are minimal because of the COGS breakdown. They have an advantage as most of the products they make are for export to the US and Europe. The most obvious downside is an overall weakening of all economies including the US and Europe, but this would effect most any company one might invest in. With Deswell's management team and strong balance sheet, they are in position ride out weakness and to achieve growth sooner and stronger than most any companies. IMO - high potential return with minimal (at today's prices- zero) downside risk.
FWIW,
Ron
Shane - at least you got your 'stupid post' erased. I usually don't realize it until 20 minutes after I sent it. Like 20 minutes from NOW. |
