High-end electronics were one of the first casualties of the consumption curbs that followed the 2008 financial crisis and resulting global economic downturn. Most technology manufacturers – with the notable exception of Apple (AAPL.NASDAQ) – have reported significant sales declines over the past 3 years.
Namtai Electronics (NTE.NYSE) is no exception. The China-based firm makes consumer electronic and communication products and LCD products, as well as doing component assembly. These business lines account for approximately 25%, 56% and 19% respectively of Namtai’s revenue.
With fewer orders coming in from large original equipment manufacturers (OEMs), Namtai’s revenue dropped 20.2% in 2008 and 34.5% in 2009, while income fell even more dramatically, by 55.9% in 2008 and 94.6% in 2009.
The company posted a loss of US$1.1 million in the first quarter of 2010 but swung back into the black with a second-quarter profit of US$3.2 million. It is up US$2.1 million for the first half. This revival is the result of management cutting expenditure on overheads, materials and labor.
Even more impressive than the net profit figure is the net cash generated – US$20 million in the first half of 2010, taking the overall balance to US$203 million. Namtai’s current market capitalization is US$210 million, which means an investor would basically buy in for the cash on the balance sheet.
This is an historic anomaly. The last time businesses in an industry traded for net cash value was right after the dotcom crash of 2000. A number of internet companies traded for cash value because they were cash flow negative, and the market assumption was that they were going to go under (which many of them did).
That’s not the case here. The market has presumably concluded that Namtai will fail to make efficient use of its cash position, and has therefore discounted the potential of the business.
Sinosage spoke to corporate Kee Wong, Namtai’s company secretary and head of investor relations, on what will happen to the funds.
“Besides the reservation of working capital equal to 10% of annual revenues, we retain the cash for capital investment, such as land acquisitions and plant/equipment purchases,” he said. “The large current balance is the result of several projects being delayed. These include a 1 million square-foot plot of land in Shenzhen to be used for business expansion purposes. It was acquired in 2005 but has not yet been released by the government. Once the projects start, we will need capital to support them.”
Namtai’s stock is currently trading at US$4.69, its lowest level ever. This is a reflection both of the company’s terrible income statement for the past three years and the market’s skepticism about future performance. Yet the balance sheet looks solid, helped of course by the cash position of US$210 million, which equates to 50% of total assets. It is a lifebelt large enough to assuage most investors’ concerns.
Sinosage believes that Namtai is a growth stock worth considering. The key questions are how quickly can the company boost revenue and how much does it need to reduce prices to remain competitive. It is worth noting that competitors such as Jabil Circuit (JBL.NYSE) and Flextronics (FLEX.NASDAQ) have already slashed prices to maintain market share – posting lower losses and smaller sales declines than Namtai as a result.
Namtai has made two major cash investments: a new factory in Wuxi, Jiangsu province, which cost US$42 million; and the privatization of a listed unit for US$44 million.
The Wuxi facility went into operation early this year, and products have been slow to sell. The plant is still cash flow negative, though management expects to break even by the third quarter conditional on further investments in technological development and management-level talent. Neither of these conditions may be met: High technology has historically not been Namtai’s competitive edge, and there has been significant management turnover in the last five years.
The privatization may prove to be money better spent. Namtai reassumed full control of Namtai Electronic & Electrical Products (formerly 2633.HK) in order to reduce costs and grow revenue. The savings might take several years to be realized, but the unit already has a track record of strong revenues, with takings up 10% in 2006 and 59% in 2007. Recouping the US$44 million spent on privatization won’t take long.
Ultimately, an investment in Namtai is an investment in the return of the high-end consumer. If shoppers’ appetites for expensive electronics return then the company is well positioned to succeed. If the consumer demand stays at this level, Namtai will continue to tread water, barely making a profit.
While the company’s short-term prospects may seem lackluster as external demand shows little sign of returning to its previous highs, Sinosage believes Namtai offers value as a mid- to long-term play.
The operational changes put in place by management should see revenues continue to improve, which means the business value is worth far more than the US$7 million (based on the market capitalization of US$210 million and balance sheet cash of US$203 million). Patient investors keen on companies with strong balance sheets, low trading prices and low price-to-book ratios should take a closer look.
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