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Technology Stocks : Deswell Industries (DSWL) -- Ignore unavailable to you. Want to Upgrade?

To: Ron Bower who wrote (673)	4/19/1998 3:57:00 PM
From: kolo55	Read Replies (1) \| Respond to of 1418

Good question. What is the LT growth rate for this company? My initial assumption(guess) is that Deswell will grow faster than the sector growth rate of 25%. So I expect 30-35% growth over a 3-5 year period. However, I realize there is a lot of uncertainty in this growth rate. Look at Elamex, the largest domestic ECM company in Mexico. In the last two years, the Mexican ECM manufacturing capability has expanded by over 100% a year, yet Elamex sales have lagged way behind, and earnings have actually fallen. The growth has been due to the building boom by larger US based international ECM companies. Elamex simply hasn't participated in the Mexican ECM boom. I don't think the same thing will happen in China, but you should realize that in assembly, the big international ECM companies have large plants in China, and are expanding rapidly. Solectron and Flextronics will both do about $500-700M each from their Chinese operations in the next 12 months. Flextronics seemingly competes directly with Deswell with plastic extrusion (FICO plastics), and metal fabrication, miniature board manufacture (Astron), and assembly operations. But in reality, Flextronics does most of their business in China for US and European international OEMs that need high volume, low margin manufacturing. I don't really believe that Deswell competes for this business; they aren't large enough. Nevertheless, Deswell has some advantages over these companies, and given its small size, could see a very fast growth rate(50%+) before they grow to a size where growth becomes more difficult. I really think the demand for ECM services in China will grow fast enough that Deswell will share in the growth. But in the long run, Deswell will need to ally itself with an international player to get the size contracts to continue growing at that point. I would predict that over the next 3-5 years, Deswell will need to buying or merging to get larger, or look to sell to an international player, to keep the growth rate up. It is possible that the niche growth segment will grow fast enough, that Deswell's customers (fairly small companies- not multinationals) will also grow or merge to become large international players. And Deswell will grow along with them. But I know in Flextronics case, they manufacture the same product on three continents for some of their customers. And the growth of its business with internationals is booming. Its the reason FLEXF is one of my largest stockholdings. Again, one of Deswell's big attractions is the big AT margins they get. These margins are higher than what the international players get, and I believe Deswell's ROI is better than the international's Chinese operations. I kind of rambled, because these are mostly opinions at this point, and I'm not firm in my convictions that all this will play out in China this way. I need to think a bit more about this. Paul