Thursday, 30 April 2015

Gtronic: High PE For A Good Reason

Globetronics FY15Q1 Financial Result

Revenue 88.7 89.9 91.1 90.6 83.4
Gross Profit 25.8 17.8 27.1 27.1 25.0
Gross% 29.1 19.8 29.7 29.9 30.0
PBT 20.4 16.6 21.8 20.8 17.0
PBT% 23.0 18.5 23.9 23.0 20.4
PAT 17.1 15.3 17.7 17.3 14.1

Total Equity 280.4 284.6 298.3 291.4 272.4
Total Assets 342.4 358.0 362.9 361.2 325.9
Trade Receivables 68.4 73.7 65.9 70.3 60.6
Inventories 15.0 19.0 15.2 13.4 11.1
Cash 159.0 155.7 167.8 169.5 141.0

Total Liabilities 62.1 73.4 64.6 69.8 53.5
Trade Payables 17.2 33.5 16.3 17.2 9.9
Other Payables 25.9 33.7 31.4 32.1 29.8
ST Borrowings 14.8 1.7 8.1 11.5 9.9
LT Borrowings 0.0 0.0 0.0 0.0 0.0

Net Cash Flow 2.8 8.2 20.7 22.6 -6.3
Operation 12.4 81.6 52.4 34.5 13.2
Investment -0.6 -21.4 -17.0 -10.9 -7.1
Financing -8.9 -52.0 14.7 -1.0 -12.3

Dividend paid 22.5 61.8 30.9 19.6 19.6

EPS 6.1 5.45 6.31 6.17 5.04
NAS 1.00 1.01 1.06 1.04 0.97
D/E Ratio net cash net cash net cash net cash net cash

Gtronic's FY15Q1 result is flat but profit margin "normalized" compared to previous quarter. Bank borrowing increases as more capex is needed.

Apart from these, there is nothing more to comment on this set of financial result.

Boring is it? Not at all for me!

Gtronic investors' eyes are on year 2016.

If we look back at Gtronic's previous years' result, we can see that its revenue and net profit especially, started to increase significantly since year 2012.

What actually happened in year 2012?

In that year, Gtronic started to produce proximity sensor used in smartphones for a Swiss customer.

         Tremendous growth of sensor revenue

We can see from the chart above how sensor business has contributed significantly to Gtronic's topline since 2012.

Will the growth continue beyond 2014?

Not only it certainly will, it is expected to grow by leaps and bounds, in which revenue from sensor division may double 2014's figure in year 2016!

How to achieve such an impressive growth?

Other than proximity sensor which currently has 23mil monthly capacity, Gtronic has started production for wearable sensors since end of 2014.

Capacity for wearable sensor has been ramped up from 3.5mil to 5.5mil/month now.

According to analyst, current average usage are at 20mil/month and 3.5mil/month for proximity and wearable sensors respectively.

So, with new contribution from wearable sensors and slight expansion of its timing device capacity (+10mil/month), Gtronic is expected to register modest growth in FY2015.

It's not finished here.

Gtronic plans a capex as much as RM60-70mil for 2015-16. This tells how much its business can potentially grow.

It plans to start production of a new product - imaging sensor (depth sensor module) in Q4 of 2015 at 4-5mil/month. This sensor is used to improve camera quality in smartphones and tablets.

Its production is expected grow quickly to 20mil/month by Q1 of 2016, and is expected to feature in a famous brand smartphone which is scheduled to launch its latest model with major camera upgrade in Q3 of 2016.

The volume of 20mil/month is almost similar to the volume of proximity sensor. As the average selling price of this imaging sensor is definitely higher than proximity sensor, contribution of imaging sensor will surely exceed proximity sensor.

Each smartphone will have only one proximity sensor and tablet without call function may not have one. For imaging sensor, it can be used in front and/or back cameras of smartphones and even tablets without call function. So imaging sensor might have more volume compared to proximity sensor.

RHB analyst predicts that imaging sensor can potentially generate revenue of RM180-250mil a year!

       Forecast growth in sensor division

Gtronic's Swiss customer is said to work on the improved 2nd generation of proximity sensor. Base on their close business relationship, Gtronic should be able to sustain or improve its revenue from proximity sensor in the near term.

Besides, Gtronic is said to be in talk with 2 potential new customers in Europe & US which include co-development of multi-die health sensor module. If successful, it will boost Gtronic's revenue and earning further.

According to AllianceDBS report, Gtronic has only one single customer so far for its sensor business which includes proximity sensor, wearable sensor and upcoming imaging sensor.

So there is a single customer risk.

This main customer is called "Swiss customer". We know that Inari has Avago, but who is this Swiss customer, and who is the end-customer with a famous smartphone brand?

This Swiss company is described as a pioneer and world leader in wafer-scale micro-optics. 

From net search, I think it is most probably Heptagon which is a Swiss company who has a main office in Singapore, and the end-customer should be the one with "A" which launched its wearable device recently.

       Heptagon's role in a smartphone

Article below are press release from Heptagon in Feb14. Do you think it is related to Gtronic?


Heptagon Announces Production-Ready 3D Array Camera for Smart Devices 
First fully integrated 3D imaging system ready for mass production in smart phones, tablets and phablets 

Singapore, Feb 13 2014. – Heptagon (, a leading provider of intelligent micro systems for smart devices, today announced the general availability of its TrueD H2 array camera, the first in a series of advanced 3D imaging and depth sensing micro systems that Heptagon is introducing to the market. The TrueD H2 camera has one of the smallest form factors currently available for mass production. 

Heptagon’s TrueD H2 array camera captures additional short-range depth information for gesture and user recognition, background removal, and enhanced imaging. Its key features are typically used for front-facing smart device cameras, but can also add value as an assisting camera to the smart device’s primary camera. 

The TrueD H2 array camera is ultra-miniature, the result of integration of its image sensor, module, optics, algorithms, and software. It is ideal for devices where size is a key differentiator, or for emerging applications such as 3D or immersive mobile video games, ‘augmented reality’, and even the explosion of ‘selfies’ with more sophisticated image manipulation and enhanced photography.

“Smart device innovations continue at warp speed, transforming the ways people interact with their devices. So, our challenge is to deliver micro imaging and sensing systems for these devices with enhanced capabilities, ultra high quality, ever-shrinking form factor and optimal cost,” said Rene Kromhof, Heptagon’s vice president of sales and marketing. “With the TrueD H2 array camera, we have proven our ability to innovate rapidly and produce high-volume, market-ready solutions that meet customers’ unique and demanding requirements.” 

In addition to enhanced depth mapping, exceptionally low z-height for ultra-slim device design, superior color fidelity and low power consumption, the TrueD H2 array camera leverages unique, patented focus correction packaging (FCP) that accelerates low cost, high quality production. FCP enables high-throughput, low cycle time module assembly, without the need for active alignment systems or barrel-mount solutions. In addition to faster line production, FCP also drives higher yield and therefore lower overall unit costs – important benefits for rapid, high volume manufacturing of smart devices. 

“We are extremely proud that our TrueD H2 array camera has already moved from development stage into volume production,” said S.C. Leong, Heptagon’s chief operating officer. “We appreciate the incredible efforts our team and our partners have put into achieving this milestone.” 

The TrueD H2 2x2 array camera is the result of more than three years of development efforts from Heptagon. The 2014-15 pipeline will include new array formats, lens enhancements, higher resolution, and additional sensing system innovations. In addition, Heptagon has recently released products that help to radically reduce the height and total footprint of smart devices, including VCSEL based illuminators and some of the world’s smallest IR emitters.


No matter what, if everything goes well according to plan, year 2016 might be a wonderful year for Gtronic.

So, is current PE of 26x too high for Gtronic?

Saturday, 25 April 2015

How To Stamp Tenancy Agreement

I first became a "landlord" and signed my first ever tenancy agreement 2 years ago. Now it's time to renew it.

Last time my property agent helped me to do everything including finding tenant, drafting the agreement and doing the stamping. I think I should learn to do it myself.

For tenancy agreement, we can download it free of charge from internet and just make some necessary amendment.

To know how and where to do the stamping, a search in internet brought me to a good local property investment blog known as "horlic".

However, this blog seems to be inactive now...

Here are steps I went through to get the tenancy agreement stamped.
  1. Prepare 2 copies of tenancy agreement signed by both parties
  2. Download and fill up PDS 1 & PDS 49A forms. Forms are available at LHDN website & branches
  3. Bring the forms and tenancy agreement to nearest LHDN branch. Get a queue number for stamp duty and then submit to stamp duty counter
  4. Wait for your name to be called at payment counter and then pay the stamp duty
  5. Get the tenancy agreement back and go home
*LHDN = Lembaga Hasil Dalam Negeri (Inland Revenue Board)

As there was not many people when I went there, I get everything done in less than 10 minutes.

It's much easier than I thought.

According to the staff there, now we can only stamp the tenancy agreement within 30 days after the starting date of tenancy period.

For example, if you rent your property from 15th April 2015 to 14th April 2017, you can only stamp the agreement from 15th April 2015 to 14th May 2015.

However, I'm not sure how strict they are with this new rule. Previously we can stamp it before the date of tenancy period.

How much stamp duty we have to pay?

LHDN staff will have a list to refer to, but we can calculate the stamp duty by ourselves using a formula. 

To know how much to pay, calculate your annual rental first then refer to the table below.

Annual Rental Tenancy period
< or = 1 year > 1 to 3 years > 3 years
First RM2400 Exempted Exempted Exempted
Every RM250 after RM2400 RM1 RM2 RM4

The first RM2400 of annual rental is exempted from stamp duty. This means that if your monthly rental is not more than RM200, you don't need to pay stamp duty.

It's easier to understand by using example.

If your rental is RM1200 per month and tenancy period is 2 years, annual rental will be RM14400.

As first RM2400 is exempted from stamp duty, only RM12000 will be charged.

So RM12000 divided by RM250 = RM48.

As it is a 2-year agreement, RM48 x RM2 = RM96.

The stamp duty will be RM96. However, we need to pay another RM10 for second copy of agreement.

So, total payable to LHDN will be RM106.

This stamp duty is commonly paid by tenants.

What if the calculated stamp duty is not a round number? 

Lets say if you rent your property at RM1600 per month for 1 year. Stamp duty will be:

[(RM1600 x 12) - 2400] / 250 = RM67.20.

I'm not sure whether it will be rounded up to RM67 or RM68. Those who knows might want to clarify on this.

In conclusion, DIY your tenancy agreement stamping is not difficult at all.

Wednesday, 22 April 2015

Matrix Eyes Puchong

After proposing a 1:6 bonus issue with free warrant last week, Matrix delivers good news again to its shareholders by acquiring a piece of prime development land in Puchong.

Matrix has entered into an SPA with IRDK Ventures to acquire 5.76 acres of  leasehold land in Puchong next to Setia Walk for RM95mil (RM380 psf).

IRDK has earlier launched its project IRDK Residences@Puchong on the site since Sep 2014 and the construction is currently in progress at earthwork and piling level.

IRDK Residences@Puchong comprises 2 blocks of 23-storey condominiums with 318 units, and also 28 units of 4-storey Link Villa (townhouse).

       IRDK Residences@Puchong

Matrix plans to change the development plan a bit and increase its density to 80-90 units/acre from 60 units/acre, giving it at least RM500mil GDV. IRDK is responsible to obtain such approval from the authority.

As the land is narrow and located in a clouded area, its initial approval is just 60 units/acre and developer has to build a multi-storey car park for the public next to it.

SPA signed by existing buyers with IRDK will be terminated and they are entitled to get replacement from Matrix's development.

       The construction site

I think Matrix will reduce the built-up size of condominium units to make it more "affordable" for buyers. Previous development offered large built-up size in order to reduce the density.

The location of the land is quite strategic being close to LDP, Setia Walk, IOI Mall and the upcoming LRT station.

So, despite guarded property sector outlook, Matrix should be able to generate commendable sales from this project I guess.

Tuesday, 21 April 2015

Fututech: The Future Is Simply Exciting

There is no doubt that Fututech's current executive chairman Datuk Tee Eng Ho has successfully transformed this previously ailing company into an exciting one.

Mr Tee and his brother first emerged as the largest shareholder of Fututech after acquiring the entire shareholding of 27.71% from E&O and Samudra Pelangi in March 2011 at only 50sen per share.

Prior to this, Fututech, which mainly involved in manufacturing, sale and installation of lighting & kitchen cabinet, suffered annual loss for 6 consecutive years, with accumulated loss reaching RM31.4mil in 2010 compared to share capital of RM58.7mil.

After Mr Tee joined in, Fututech immediately turned profitable until today.

       Fututech financial results

Mr Tee brought with him experience in construction industry which saw Fututech successfully diversified into construction business by securing 2 sub-contract works in the second half of 2010.

Those contracts were to construct high-rise building of St Mary Residence in KL and Seri Tanjung Pinang in Penang. Both projects are awarded by E&O.

This has resulted in immediate surge in revenue and profit in year 2011 & 2012.

After 2012, it seems like there is no more major new construction work and so its revenue fell drastically in 2013.

It is currently holding just about RM200mil worth of contracts in 2014. Its lighting & kitchen cabinet business mostly just cater for its own needs.

In year 2013, Fututech started to venture into property development business by acquiring 2 parcels of land in Genting Permai (1.43 acres) and Shah Alam (8 acres) for RM24.5mil.

It has just launched its first property project Vista Residence at Gohtong Jaya (Genting). This leasehold project consists of 378 residential units and 28 retail lots in a 27-storey building, and has a GDV of RM300mil.

Its second property project at Monterez Golf & Country Club (Shah Alam) which carries a GDV of RM200mil is expected to be launched later this year.

       Vista Residence @ Gohtong Jaya

I started to come across Fututech in Dec last year. I knew that its profit was going to increase significantly by venturing into property development business.

To me, it's one of the many listed companies who want to share a slice of cake in property development business.

As property sentiment is rather bad, I was not sure whether Fututech can generate good sales and launch more and more projects consistently after these 2 projects. This is a case almost similar to Weida.

I didn't follow up on Fututech and so I missed its announcement and share price movement in Feb15.

On 6th Feb 2015, Fututech proposed to acquire 2 companies privately owned by its executive chairman Datuk Tee Eng Ho, which are Kerjaya Prospek S/B (KPSB) and Permatang Bakti S/B (PBSB) for RM380mil.

KPSB is a construction company and PBSB is a construction management company.

The jewel here is KPSB which is said to be a well-known "specialist" in high-rise building construction.

It claims to have current contracts worth RM2.25bil on hand. I'm not sure whether this figure is total project value or current outstanding value.

Recent notable projects by KPSB include:
  • E&O's Seri Tanjung Pinang (RM410mil)
  • Eco World's EcoSky (RM 463mil)
  • SP Setia's Setia Sky 88 (RM463mil)
  • 100 Residency Setapak
  • The Shore @ Malacca River

It shows that KPSB has good business relationship with the country's top property developers such as Eco World, SP Setia & E&O. The latter 2 projects are Mr Tee's private property projects.

For the last 3 financial years of 2011, 2012 & 2013, both companies to be injected into Fututech has an average profit after tax of RM31mil.

For KPSB, it registered RM33.3mil net profit in year 2013 and has no borrowing.

The interesting part of this acquisition is, Mr Tee gives a profit guarantee of at least RM150mil for 3 years from 2015 to 2017.

To fund the acquisition, Fututech will issue 280 million new shares at RM1.16 each plus cash of RM55.2mil.

Before the day of announcement of acquisition, Fututech's share price closed at RM1.15. The next day, it shot up 27% to RM1.46 before closed at RM1.30 for a 13% gain.

After that, it is on its continuous uptrend until today.

       Fututech: breaking new highs

It is expected that Fututech's profit will jump by leaps and bounds after the acquisition of KPSB & PBSB. However, its paid-up shares will also increase by leaps and bounds and its share price has moved up by leaps and bounds as well.

Is Fututech still attractive at share price of RM1.79 now?

There is a profit guarantee of RM150mil in 3 years from 2015 to 2017. The acquisition will only be completed in the 2nd half of 2015. So, 2015's result might not be that "great".

Moreover, I'm not sure whether the RM150mil is calculated from Jan15 or from the day the acquisition is completed.

Anyway, in average, it will be RM50mil net profit per year but we know that profit recognition of construction business will fluctuate a lot so it's not easy to predict.

Fututech will launch property worth RM500mil this year. If they are fully sold and has net profit margin of 20%, then it will be another RM100mil profit in the next 3-4 years.

Usually we can only see significant property contribution in the final year of construction which is around 2-3 years from commencement.

Its manufacturing segment is not expected to grow much or contribute significantly. This segment posted a pretax profit of RM3.3mil in FY14.

       Progress of Vista Residence (April 2015)

In summary, Fututech's financial results are likely to increase progressively from year 2015 to year 2017, with best result achieved in 2017.

From a local newspaper interview, Mr Tee mentioned that after the acquisition Fututech can "cin cin cai cai" (ie. easily) achieve RM200mil cumulative net profit from 2015 to 2017.

Base on what Mr Tee predicted, I would guesstimate roughly RM80mil net profit for Fututech in its FY2016. This is almost 6x better than RM15mil net profit in FY14.

I think this assumption is not too conservative as construction cost are going up and Fututech might delay the launch of its Shah Alam project.

Anyway, I expect that Fututech can get more new construction contracts along the way.

After the issuance of new shares, Fututech's paid-up shares will increase form 91 million to 371 million. If it were to post RM80mil net profit in FY16, then guesstimated EPS for FY16 will be 21.5sen.

However, if we add in 26.7mil warrants which will expire in Dec 2017, diluted guesstimated EPS will be 20.1sen.

So Fututech might worth at least RM2 in 2016 if we give it a PE ratio of 10x.

       Fututech's FORTE Kitchens

Will Fututech continue to grow beyond 2017?

It is reported by The Edge that although Fututech wish to make property development its main business in the future, it does not expect to acquire more land until FY2017. It has no more land besides the Genting and Shah Alam land.

Fututech is a specialist in high-rise building construction. Can it get contracts for construction of roads, LRT/MRT and others? Can it get government contracts which typically has higher margin?

There is no doubt that Fututech will become a much much better construction company after the assets injection. However, it needs to get more projects in order to grow beyond 2017.

With its relation with other renowned property developer especially Eco World, it seems to have a bright future.

In the future, we cannot rule out another asset injection by Mr Tee.

Mr Tee still owns a private property development company known as Kerjaya Prospek Property Sdn Bhd which owns Malacca's tallest building The Shore @ Malacca River.

Its other property projects include Residency V (Old Klang Road), 100 Residency, 222 Residency, 288 Residency (all Setapak) & Viridian Cheras Idaman.

       The Shore @ Malacca River

Mr Tee seems like a humble person who grows up from a poor family in which both his parent were rubber tappers.

I feel like he will grow his empire through Fututech so it might just be a matter of time for his private property company to be injected into Fututech.

Is this the reason why Fututech does not plan to purchase development land until FY2017?

Sunday, 19 April 2015

Eco World Lights Up Northern Batu Kawan

More than one year ago, it was reported that Eco World was the sole runner to acquire a site in the northern part of Batu Kawan for development of golf course.

Now the deal has been confirmed. Eco World will lease about 150 acres of land from Penang government to develop a minimum 18-hole international standard golf course and clubhouse for RM65.34mil. The lease is for 30 years with an option to renew for another 30 years, 

Meanwhile, EcoWorld also acquires 299.64 acres of leasehold land in the same area for RM730.93mil for its own property development known as Eco Marina.

Eco Marina has a potential GDV of RM10bil with 60% residential & 40% commercial development.

The location of land is on the northern tip of Batu Kawan, which has hilly terrain and can be developed into "luxury, green, eco-friendly hilltop living".

What's more, the land which is next to Pulau Aman jetty, is also "sea-fronting" or more accurately, Jawi River mouth-fronting and it will be good if Eco World can clean the river and transform it into a clean "Marina".

       Batu Musang jetty at Batu Kawan to Pulau Aman

Previously, major and exciting development of Batu Kawan are all concentrated in the southern part of Batu Kawan. These include Batu Kawan Industrial Park, IKEA, KDU, Hull University, Logistic Hub, Premium outlet etc.

The middle part of Batu Kawan is planned for PDC's affordable apartments and perhaps luxury landed houses on the other side.

Northern part of Batu Kawan is the earliest to be developed since the state stadium was ready for SUKMA in year 2000.

That was 15 years ago and most of the early development are low-medium cost landed houses.

A more exciting story in northern Batu Kawan is about GOB's Crescentia Park. Currently this area is occupied with landed low-medium cost units and may be this is the reason GOB is slow to launch its projects here.

With the entry confirmation of such a glamorous developer like Eco World, development of Batu Kawan will be more "balanced" geographically and the overall chance of success will be lifted.

So, even though Eco World will bring in competition, I think GOB should be very happy to have Eco Marina opposite its Crescentia Park.

Monday, 13 April 2015

Growth Or Dividend?

When I started to invest in stock market seriously since mid-2013, I have a clear plan.

I plan to invest only in small to mid cap growth stocks, hold for longer term until the day I think its growth has stopped or slowed down significantly.

Dividend is not that important to me.

I have to do this as I have limited seed money to start with, and I think my priority is to grow the money as fast as possible so that I can accumulate enough fund for retirement, which is my ultimate goal.

If I can reach retirement later, I plan to put more money into lower-risk investment vehicles such as fixed deposit, bond funds or blue chip stocks, and hope to survive on interest & dividends earned.

Basically I don't invest solely for dividends at this stage, but if the growth stocks pay good dividends along the way, then it's a bonus.

As we know, dividend yield = annual dividends per share / share price. High dividend yield may not necessarily mean good.

For example, a blue chip stock's share price is at RM10 and it pays 60sen dividend a year. So, it has 6% dividend yield now.

If its profit grows consistently year after year, it will pay higher dividends as long as its dividend payout remain the same, and its share price will go up accordingly as long as the market gives it the same PE ratio. 

Lets say its profit doubles after 10 years and it has similar dividend payout. If the market gives it similar PE ratio, its share price will be doubled to RM20 and dividend will also be doubled to RM1.20 per share. Its dividend yield will still be 6%.

After 10 years, even though its dividend yield is still 6%, investors enjoy 100% capital gain and more actual dividends in cash. 

If the company's profit is flat for 10 years, dividend payout and share price will stay stagnant but investors can still get 6% return every year which is still better than current FD rate of 3-4%.

However, if the company's profit is deteriorating year after year, its dividend payout and share price are likely to decline as well. 

Lets say if its profit drops by half after 10 years, its share price and dividend will fall by half as well to RM5 and 30sen respectively. Its dividend yield is still high at 6% but investors not only suffer 50% paper loss, but also less actual dividends received along those 10 years.

We have to pray that our dividend stocks deliver at least flat results, if not growth, to increase our wealth.

So focusing solely on dividend yield might be misleading, especially when the company has some one-off gain and gives one-time special dividend.

Anyway, stocks are called blue chips because they are huge and stable, has significant competitive edge or monopoly in their business, and has proven track record.

So it's unlikely they will give persistent deteriorating profit over many years though profit might still fluctuates. However, undoubtedly growth will be slow and limited.

For me, growth is still the most important part of my investment.

So I plan to invest in high dividend yield blue chips stocks only after accumulating enough money for retirement.

Typical textbook teaching tells us that growth stocks tend to give little or no dividend as they need more money to grow. 

However, from my experience so far, I find that many growth stocks can give better dividends than blue chips, and their share price certainly move up much faster than blue chips.

Why not investing in such stocks?

Some examples are Inari, Gtronic, Pintaras, BJAuto, Homeritz, Poh Huat, LiiHen, Wellcall, VS, Matrix, Huayang, Tambun etc...

Of course we don't expect the growth will continue forever.

There will be a time when property, smartphones or furniture demand drops, and when the great time for O&G and plantation finally arrives, those growth stocks in these sectors will perform well.

Now we know it's not a good time for property, so we expect lackluster financial results from most property stocks in the next few years to come.

By right I should have sold all my property stocks by now but I didn't. I didn't execute my initial investment plan well... Why?

Out of 3 pure property stocks I hold, I opine that Matrix and Huayang can at least sustain its current earning level for the next 2 years. So I decided to hold and see, since they are also generous in rewarding shareholders.

For Tambun, its growth phase might be over and I have decided earlier to sell all of its shares in stages.

However, I was quite surprise to see better-than-expected demand from its recent launch, which include the new apartment in Pearl City, Avenue Garden. I see almost 70% of Tower 1 have stickers on them and now Tower 2 are open for sale.

They even withdrew some earlier promotion because sales is better than expected.

Its International school and shopping mall are on track to be completed this year, and should be able to collect some rental income.

Besides, it has also just purchased a piece of land in prime location in Bukit Mertajam.

It is rumoured that EcoWorld will launch its project Eco Meadows in Simpang Ampat within this year with 3-storey terrace starting from RM850k. This makes Pearl City's property looks cheaper.

It is also rumoured that Bank Negara may lower interest rate in the second half this year. Will it breathe some life into property sector?

Tambun might have an "outside chance" to sustain its RM100mil annual profit this year.

After that it is hard to predict. It can be better or poorer.

Who knows it will later renegotiate the previously cancelled huge land deal next to its Pearl City and successfully acquire it?

I'm still thinking whether to keep or sell my remaining Tambun shares. Should I sell for other growth stock or keep for good dividend?

Tambun should give at least total 9.5sen dividend for its FY14, and it is still a good yield above 5% now.

Perhaps I have fallen in love with this stock, which I know is one of the deadliest mistake investors should avoid.

Tambun is the one and only stock which occupied my core portfolio before. It almost single-handedly reverse my previous loss in stock market.

However, if it gives negative surprises repeatedly like Zhulian, I will not hesitate to sell all even though its dividend yield is still attractive.

Monday, 6 April 2015

Geshen: Gets Double Boost

Geshen is primarily a plastic injection molding player like the famous high-flying VS Industry & SKP Resources. It was incorporated in 1995 and is based in Johor Bahru.

Base on FY14 full year net profit of RM2.56mil, it is currently traded at actual PE ratio of 18x at recent average share price of 58sen which is not attractive at all.

Its injection molding business seems to hit the bottle neck in which its annual revenue always stays at around RM80mil with little and fluctuating net profit since year 2005, except lower turnover and net loss during economy crisis in 2008/09.

Its management took some steps to grow the group by diversifying into cosmetic & skin care business in 2010, and then into manufacturing of fiber products (like Heng Huat) since 2012.

Unfortunately, these two new business ventures do not live up to expectation and incur loss without fail to the group since operation.

Here comes the first BOOST.

Geshen has disposed these 2 loss-making subsidiaries. The disposal was first announced on 19th Dec 2014 and was announced as completed on 2nd Mac 2015.

How will the disposal affect Geshen?

From Geshen's latest FY14Q4 financial report, it is mentioned that these 2 subsidiaries registered total loss of RM4.283mil in the whole FY14 (red box below).

The PBT & PAT of its continuing operation (ie. plastic injection molding) in full FY14 is RM8.733mil & RM6.825mil respectively.

However, there is a one-off pre-tax gain from disposal of subsidiaries amounting to RM1.194mil in Q4.

After deducting this special gain, its plastic segment PBT should be RM7.539mil, and PAT should be RM5.9mil base on similar 21.8% tax rate.

If its plastic business can maintain its performance and reports similar RM5.9mil net profit in FY15, then its EPS will be 7.38sen (80mil shares). 

So the projected PE ratio for FY15 will be 7.8x.

Nevertheless, there is a significant drop in revenue of FY14Q4 due to reduced order. This remains a concern.

The second BOOST is its proposed acquisition of its peer Polyplas which does exactly the same thing as it does.

Geshen will acquire 75% of Polyplas for RM33.8mil which will be paid by internal fund and issuance of 30 million Redeemable Convertible Preference Shares (RCPS) at 60sen each which are convertible into ordinary shares within 5 years.

The RCPS will raise RM18mil and its holders are entitled to 5.5% dividend per annum. 

Geshen has the option to acquire the remaining 25% of Polyplas in the future.

How good is this Polyplas?

Polyplas is incorporated in 1988 and is based in Bukit Mertajam Penang.

Though Polyplas is only half the size of Geshen in term of annual turnover, it seems to me like Polyplas is a more exciting company for reasons below:

Polyplas is growing

Compared to Geshen's stagnant revenue, Polyplas's revenue improved significantly by 39% YoY in its FY14 (ended Oct14). 

However, we don't have long enough data to ascertain that it is really a consistent growth, as revenue of contract manufacturers can fluctuate a lot. 

Anyway, recent growth is still a good sign. It is even constructing a new factory recently to increase its production and warehouse space. It is expected to be completed in Aug 2015.

Polyplas FY14 production capacity utilization rate is at approximately 52% based on operating hours.

The utilization rates based on various machine tonnage are as follows:

There are different machine tonnage which caters for different customers' products so it is almost impossible to utilize all the machines at one time.

Anyway, it is reported by analyst that SKPRes has current utilization rate of 75-85%, from 60% during its disappointing time in calendar year 2013. It has constructed new factory that will increase its capacity by another 75%!

       Polyplas @ Bukit Minyak

Polyplas has much better profit & margin

Despite lower revenue by half in FY14, Polyplas manage to produce better net profit than Geshen. 

This is because of its unbelievably high net profit margin of 18% in FY14 despite an effective tax rate of 22.6%.

Report says that this is achieved through better sales and production efficiency, without any one-off special gain.

Polyplas has more diversified business & customers

Geshen mainly involved in plastic injection molding for Electrical & Electronics sector, primarily in audio-visual segment.

Apart from E&E sector, Polyplas has capability and business in manufacturing products for medical sector which might be the next investment theme.

       Medical products by Polyplas

Polyplas derives 55% of its revenue from export sales to Asia, Europe and US, while 85% of its raw materials/components are sourced locally in FY14.

       Marked sales improvement across the board

There should be a mistake in the table above in FY14 which I think sales to Hungary should be close to zero. However, overall sales to Europe still increases by a good 33% YoY.

Geshen's has largely Japanese customers but Polyplas has wider geographical presence and strangely, there is no Japan in the list.

Polyplas's main export country in FY14 is US, which makes up about 37% of its export followed by Europe (32%) and Asia (31%). So, acquisition of Polyplas will give Geshen a good global exposure straight away.

US economy is recovering while Europe and Japan are busy printing money now. Will this give Geshen another boost?

Polyplas has much better official website

Though this is half joke but I have a tendency to judge a company by looking at its website, though I know that it's wrong.

Both VS and SKPRes also have lousy website design but they are good companies.

You can go to Geshen and Polyplas official website and see for yourself.

Geshen will acquire 75% of Polyplas. If Polyplas can achieve similar net profit of RM7.9mil in FY15, then Geshen will get RM5.9mil.

If we add together projected net profit of Geshen (RM5.9mil) and 75% profit of Polyplas (RM5.9mil), it will be RM11.8mil.

After the corporate exercise, Geshen's outstanding shares will remain at 80 million as long as no RCPS are converted into ordinary shares. So, guesstimated FY15 EPS for Geshen will be 14.8sen.

After all the RCPS are converted, Geshen's shares base will increase to 110 million. So, diluted guesstimated EPS will be 10.7sen.

Please bear in mind that even though Polyplas produces a great profit margin and financial result for FY14, it does not mean that FY15 cannot be poorer.

Anyway, sooner or later Geshen will acquire the remaining 25% shares of Polyplas. If Polyplas remains profitable, then it will add a significant amount of profit to Geshen in the future.

Geshen does not acquire 100% Polyplas's shares at one go as it wants Polyplas's director and founder Narinder Singh to stay committed to lead the company.

Mr Narinder is a real entrepreneur and almost single-handedly leads Polyplas. His leadership was just recognized last year and it remains a mystery why he decided to sell his company.

Overall, at below 60sen per share, Geshen looks undervalued after all those corporate exercises which is expected to be completed in the 2nd quarter of 2015.

Its RCPS is set at 60sen per share which is higher than current share price of below 60sen!

Balance sheet and cash flow of Geshen is good and it currently has net cash of RM10.8mil. It needs RM15.8mil cash to acquire 75% of Polyplas so apparently no more net cash after this.

Geshen shares liquidity is very low, with merely 80 million paid-up shares in which only 25.96% are in public's hands and the top 30 shareholders have already taken up 91.6% of the company.

Earlier this year, its public shareholding spread of 22.83% was not compliant with listing rule so its major shareholders have to dispose 2.5mil shares in Feb15 to lift the figure to 25.96%.

When I first notice Geshen through an article by Icon8888 in i3investor, I actually have the same excitement as when I first discovered Latitude Tree. 

Both have operation in Vietnam and both are going to acquire something that will boost their earnings significantly.

Latitude produced superb organic growth with magnificent quarterly results while Geshen is going to get rid of its loss-making subsidiaries.

However, Latitude is one of the market leader in its industry but Geshen is not. Latitude's revenue is growing all these years but it is not the case with Geshen.

Plastic injection molding is a highly competitive industry with over 1,500 manufacturers in the country.

VS Industry and SKP Resources/Tecnic are clear market leaders. Other listed players include LCTH, HIL Industries, Kumpulan H&L, Luster etc.

Once these contract manufacturers get a fat contract to manufacture and assemble something new, their revenue and profit will surge. This is shown in VS (Keurig coffee machines) & SKPRes (Dyson vacuum cleaner). 

Geshen is clearly still not in that league but it has been trying to grow the company through diversification twice since 5 years ago. Hopefully it's third time lucky for Geshen.

SKPRes is trading at high PE of over 15x now but it seems to have strong growth and capacity expansion ahead. Otherwise I think fair PE for this industry should be 10x.

For Geshen, it might only command a PE of 8x the most. I'll use my FY15 forecast diluted EPS of 10.7sen to set my target price. Thus my target price for Geshen will be 86sen.

It's better to be more conservative as Geshen's FY14Q4 revenue drops 35% QoQ, and Polyplas might not sustain its good performance in FY14.

Though disposal gain of its subsidiaries are consolidated into its FY14Q4 report which ended in Dec14, but the completion of disposal was only announced on 2nd Mac 2015. So I'm not sure whether the loss-making subsidiaries results in Jan-Feb15 will still be included in its FY15Q1 or not.

With wider customer base, inclusion of Polyplas management team and diversification into medical products, hopefully Geshen can achieve significant organic growth which it fails to achieve in the past 10 years.