In some places of this article, we have reported statements by ‘sources’, to protect the confidentiality of the source.
Well, at least Valuetronics catered a good lunch, ripe with your cereal prawns, nasi lemak, and curry.
But I overheard one shareholder asking,
Why don’t you let us dabao (take away)?
You get the idea.
People are really after a bargain here in Valuetronics.
And a bargain might just be what you get, if you’re looking at Valuetronics as a potential stock to buy.
Let’s get right in.
I walked into the Furama Hotel on Monday, not knowing what I’d really get. If you’ve attended some of these Annual General Meetings before, you would know that some people are there for the food, and that many do end up asking the Board about the share price.
One shareholder, funnily enough, did ask the Board to make a pledge that they would uphold the interests of shareholders and not ‘be a sleeping board member’.
That’s a story for another day.
But first, what do you really sell?
I will confess that before I went in, I wasn’t too sure what Valuetronics did for a living.
Of course there’s the spiel about how it is
an integrated Electronics Manufacturing Services (EMS) provider… covering smart lighting products, printers, temperature sensing devices, communication products and automative products.
It wasn’t until a source close to the company gave a useful analogy.
It’s like a zichar store (the store that cooks fried rice, noodles, and dishes like vegetables, chicken wings, and everything else).
Using the same equipment and capabilities, they can cook up a huge variety of dishes (products).
Chairman and Managing Director Tse Chong Hing also shared about the ‘portfolio’ theory of manufacturing, where they didn’t limit themselves to a specific line of products. Instead they built many different products, and translated the lessons to manufacturing for others.
Initially, this didn’t make sense for me, especially when you look at the likes of Foxconn, that has grown rich from manufacturing for Apple.
But later, the source also reported how this expertise in engineering design, and manufacturing allowed it to be a value-added partner to the customer.
Stickier relationships with the customer
Rather than being in a supplier-customer relationship, this ability to value-add in terms of suggestions around design, savings in efficiency, would make the customer stick to them for a longer period of time.
This means that instead of having the typical customer that shops around for the ‘cheapest’ supplier, they have customers that see the value Valuetronics provides, and is willing to Paya them a bigger margin for that.
Explaining the share price
There were a considerable number of questions about the current share price and how the board planned to catalyse the growth of the share price.
One measure that the Board had already put into place was the HK$250 million share buyback scheme, of which it had utilised HK$65 million over the past year.
Share buybacks often work because the earnings are divided over a smaller number of shares, which results in the earnings per share being boosted.
Another shareholder asked about whether the capacity for the new Vietnam campus was maxed out.
To which Chairman Tse Chong Hing replied that two of the three floors were currently being utilised.
That said, it is (in my view) amazing that they have managed to squeeze out such a profit despite the factory not being at maximum capacity.
But the wider reply involved the attractiveness of the Vietnam campus for customers. Chairman Tse mentioned how in interactions with customers, having a multisite location (outside of China) showed businesses that the manufacturer was serious.
The Vietnam campus was not an afterthought
One thing that caught my attention was how both Chairman Tse, and the Executive Director Chow Kok Kit, said that the Vietnam campus was something they had been looking for for some years.
It wasn’t something that was a knee-jerk reaction to the US-China tensions.
Rather, they had been traveling to different locations to look for another manufacturing site. Vietnam was thus a ‘natural expansion’ and growth of the company, rather than a sudden measure taken because of geopolitical tensions.
What this showed (me) was an ability to strategise beyond the here and now.
Why so much cash?
Another shareholder asked about what was being done about the HK$1 billion (and yes, that’s not a typo, it is billion with a capital B).
One thing it offers is optionality.
They don’t have to take customers that are unprofitable. With cash in the bank, Valuetronics does not have to bow down to customers who try to squeeze its margins.
That has allowed its margins of 6 to 7% to remain consistently above the average margins in the industry of 3 to 4%.
Even in its 2015 Annual Report, Valuetronics had already reported,
As the aggressive pricing strategy by CE (Consumer Electronics) customers for mass market products will eventually affect our margins, we have been reviewing our CE portfolio with the aim of focusing more on higher value-added products as opposed to mass market products.
As a result, you may see them doing products like those below, with lower volumes, but at a higher profit margin.
For me, this does reveal an ability to take good deals, and not just deals that seem nice on paper.
It does show its management capability.
How good is this management?
My source shared a story that was particularly memorable.
Apparently both Mr Tse and Mr Chong are in the factories from Monday to Friday, only going back on the weekends to see their families.
Hear that, and you will begin to realise just how this company has made it so far, for so long.
If you’ve been a long term shareholder of Valuetronics, stay the course, and keep adding, as their dividend can be considerably large.
There may not be much of a catalyst though, because they tend to downplay their achievements, and contractual obligations also mean that they can’t just go around telling everyone that they have acquired X company as a customer.
But if you’re considering whether to go in, it depends on your horizon. If you’re expecting a share price jump of more than 10% in the coming year, the probability may not be high.
Its share price will likely grow like clockwork.
If you’ve the patience to ride it out, it may just work.