Tek Seng: Power Up Toward The Sun

Current hot stock Tek Seng's share price has surged 157% in less than 2 months from 33sen to 85sen.

On 11 Sep 2014, Tek Seng announced that it has entered into an MoU with Taiwan-listed Solartech Energy Corp (SEC), who will invest RM100mil in Tek Seng's 86.1%-owned subsidiary TS Solartech.

       TS Solartech @ Penang Science Park

Tek Seng is primarily a manufacturer of PVC & plastic related products. It officially diversified into the manufacturing of solar photovoltaic cells in 2012 through its initially 60%-owned TS Solartech. Apparently Tekseng has increased its stake later to 86.1%.

I have written about Tek Seng earlier in July 2011 when it announced its decision to diversify into solar PV cells. I had a strong intention to bet on this stock, as I thought solar power will become something common like LED and smartphone. I even went to its new factory construction site at Penang Science Park a few times to see its progress.

Tek Seng's initial plan is to start with one production line in the first quarter of 2012, and gradually increase to 6 lines by 2016. 

According to The Star report in 2011, TS Solartech is expected to generate RM130mil to RM170mil revenue in year 2012.

If it can achieve RM130mil revenue, and if we assume a conservative net margin of 5%, it will be RM4mil net profit for Tek Seng with 60% stake. This will be more than half of its RM7.1mil net profit from its existing business in 2011.

I did not invest in Tek Seng straight away, as I wish to see the actual contribution from its solar division first.

       Tekseng's PVC flooring products

Tek Seng's solar PV cells production started only in June 2012. So for FY2012, it achieved revenue of merely RM0.21mil, which was a far cry from its "expected" revenue of RM130-170mil. It suffered RM7.65mil pre-tax loss as a result.

When TS Solartech contributed fully in FY2013, its revenue increased to RM12.4mil, but pre-tax loss has widened to RM13.9mil.

For the latest first half of FY2014, revenue from solar division jumps significantly to RM20.7mil (cumulative 6 months period), while PBT turns green at RM1.15mil.

However, if it is not because of "other income" of RM6.9mil, its solar division actually still suffers pre-tax loss of RM5.7mil in 1HFY14. I'm not sure what makes up "other income" here.

The good sign is that revenue in solar division has picked up greatly, and the loss has narrowed a bit, though it is still far behind its expected revenue of RM130-170mil.

If TS Solartech achieves greater economies of scale later as it ramps up its production capacity, it can anytime turn the tables in style.

In early March 2013, Tek Seng announced its plan to expand its 60MW plant to 640MW (production capacity) by 2015, with a target of eight production lines by 2016. It is more than 10 times increase in capacity!

It has already spent RM120mil on its plant and will need another RM480mil for expansion. This should be the purpose of SEC's RM100mil investment in the MoU.

Tek Seng is a small company with shareholders equity (net assets) of just RM134.6mil. The investment in its solar division seems to be massive. Even after its share price has more than doubled, its market cap is only at RM200mil.

Anyway, Tek Seng's stake in TS Solartech will drop after the investment by SEC.

       Solartech Energy Corp, Taiwan

Nevertheless, it is hard to predict Tek Seng's financial performance and fair value at the moment. 

It might have increased its production capacity but I'm not sure regarding the demand of solar PV cells and its factory utilization rate. It was earlier reported that there was an oversupply of solar cells mainly from China, which has caused a drop in its selling price.

For those who have taken position in Tek Seng in the past 1-2 years, they are surely handsomely rewarded from their patience right now.

At current share price of 84.5sen, is Tek Seng still undervalued or overvalued? I don't know. Can its bottom line explode next year? I don't know.

As usual, higher risk higher return. I do not have enough patience and I am not willing to wait and take the risk earlier, so I can only punch my chest now.