Valuetronics

Kim Eng on 29 Mar 2012


Background: Valuetronics is a smallish but innovative electronics manufacturing services (EMS) company, focused on OEM (80-85% of sales) and ODM (10-15%). Its management is based in Hong Kong and it has two factories in Guangdong Province in China (Huizhou City and Daya Bay). It also has a new licensing arm where it has taken on on design and manufacturing rights for certain of major customer Whirlpool’s product categories.

What makes it different: Valuetronics’ differentiating factor is its focus on green technology products (e.g. energy-saving LED lighting solutions for Philips) as well as customers with strong brands (e.g. Whirlpool – home comfort aids such as air purifiers, KitchenAid – high-end cooking appliances, and Graco – digital baby monitors).

Licensing business doing well despite poor economic conditions. A year from its inception, Valuetronics is seeing significant growth from its newest revenue stream – brand licensing. 9M12 revenue from licensing of $57m (3% of revenue) has already exceeded full year revenue of $33m in 2011 (1% of revenue). Valuetronics started with just one product in 2011 – an air purifier for Whirlpool. In 2012, it added two more products – an electric fan and a consumer heater. The main demand comes from major retailers in North America, and has been steadily growing despite the sluggishness of the US economy and lower consumer spending.

9M12 profit down but revenue, cashflow improved. Net profit fell 1% in 9M12 reflecting the impact of higher manufacturing challenges in the PRC, namely pricing pressure, Renminbi appreciation, higher labour costs and inflation. However, 9M12 revenue rose 23%, driven by strong growth by one of its OEM customers that outpaced the overall slowdown in demand from the category. Also, free cashflow improved and turned around on the back of lower working capital requirements.

10% dividend yield at 4x earnings. Valuetronics declared 14 HK cents/share in dividends in 2011, about 40% of its earnings. At current levels, this works out to almost 10% yield. Assuming flat earnings and the same payout ratio, dividend yield appears to be attractive for a cheap stock (just 4x price to earnings) with a decent business.

Shareholders recently sold shares. However, there may be an sentimental overhang as two major shareholders and directors of the company recently sold 26m shares at $0.24.