Denise,
Let me try to answer your questions on TOM. First off, I am a shareholder and have done my DD on the company. This company has an outstanding PEG ratio and is generating healthy cash flow - both strong indicators that I like to see in a micro-cap.
In response to your questions, I will do my best to answer them based on my knowledge of the company and the telecommunications industry as a whole (I am currently employed with a large Canadian telecommunications company, and have been for the past eleven years).
In terms of TOM, the issue of doing business in China some 13,000 miles away is not as difficult as it may seem. TS Telecom International, TOM's wholly owned subsidiary is based in Hong Kong. Ben Chong, the President and CEO of the company is also based in Hong Kong. A large portion of their staff and virtually all their sales personnel are based either in Hong Kong, or in one of their four Chinese branch offices. Therefore all day to day operations are managed from Hong Kong, not from Canada.
In terms of why they are not doing business here in Canada first, the answer is that there is far greater opportunity in China. Only 6% of the population in China has access to a telephone versus about 99% in North America. Existing telecommunications companies in Canada and the US are paring expenditures to prepare for increased competition. As well, there is a long well established list of trusted vendors such as Nortel, Lucent, Newbridge, Motorola, ADC, Ericsson, etc. who dominate the market. This is not the case in China, where everyone is a new entrant, trying to establish a foothold.
As well, for the most part, the products that TOM offers do not compete with the big guys. The one exception to this is their digital loop carrier product (UDLC). Monitoring and maintenance products are more of a niche focus in the telecom field, and one within which a small company such as TOM can excel if they have the right combination of product quality and market timing.
As well, selling into the Chinese market requires strong relations with local companies. TOM has spent the last three years developing these relationships. It will be increasingly difficult for another entrant to displace them.
Yes there is a risk associated with doing business overseas and especially in a foreign country run by a Communist government. However, having their wholly owned subsidiary headquartered in Hong Kong helps substantially reduce this risk.
Yes I take this risk into consideration and that is why I never allocate more than a small percentage of my portfolio to small caps, and an even smaller percentage to any given company. TOM has shown three years of very solid earnings and revenue growth. The stock is trading at a paltry multiple on trailing earnings, and there appears to me to be little downside to the stock from here. So - I bought some.
gord |
