If you are sick and tired of Donald Trump’s antics, look no further than this stock to bypass the Sino-US trade war!

SGX Mainboard-listed Valuetronics Holdings Limited is a premier design and manufacturing partner for the world’s leading brands in the Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) sectors.

During its results announcement, Mr. Ricky Tse Chong Hing, Chairman and Managing Director of Valuetronics commented: “Our leased facility in Vietnam has been qualified by our customer and shipments to US have already started. This alternative option in Vietnam that we have provided is part of our value-added service to customers that are looking at diversifying their manufacturing footprint outside of China. We intend to acquire a plot of land to build our own manufacturing facility in Vietnam so as to cater to future customer needs.”

Now that it has an operational plant near but outside China, the company looks likely to receive more enquiries from potential customers who do not want to pay the punitive tariffs. We opine that this move is a major positive for Valuetronics although it is not the first EMS (Electronics Manufacturing Services) player to do so. However, having done so gives it an edge over competitors who do not have facilities in Vietnam. Moreover, the cost structure of doing business in Vietnam is now even lower compared to conducting operations in Mainland China, which will probably give its margins a boost.

In the first quarter of FY2020, net profit fell 3.1 percent from HK$49.7 million to HK$48.1 million in the previous corresponding quarter. Revenue, too, fell 7.1 percent to HK$654.3 million from HK$704 million a year ago.

In explaining the weaker results, Mr. Tse attributed the performance to lower overall demand from customers in both the CE and ICE segments. However, this was achieved on the back of an improvement in gross profit margin – a 0.5 percent increase to 15.1 percent. We view this rather positively amidst tough operating conditions arising from the trade war.

Net Cash Is King

How to dislike a company that managed to improve its margins despite headwinds? We like it even more when Valuetronics, as at 30 June 2019, had net current assets of HK$934.3 million, total assets of HK$2,102.5 million and shareholders’ funds of HK$1,206.2 million. The company also had zero debt and cash and bank deposits of HK$993.0 million.

With 434 million shares in issue, this translates into HK$2.28 per share or S$0.403 per share! If we were to strip away the cash portion, investors are only valuing the operations of Valuetronics at only $0.22 (based on share price of $0.62)!

If we were to assume – pure assumption – that net profit was to remain the same in FY2020, its EPS would remain at HK$0.46 or S$0.08, its trailing PE would be less than 3 times. And if we further assume that net profit would fall by 50 percent due to the full impact of the trade war being felt this year in 2019, its PE would rise to 6 times.

What’s The Bad Thing About It?

With such a huge cash hoard, a dividend policy and a historical dividend yield of 5.6 percent, we see no reason why the management does not want to return cash to shareholders. This is the main bugbear that we have.

If the trade war was to hit Valuetronics badly assuming that its customer base consists of primarily US-based company, then the numbers going forward into FY2020 can look ugly. Since the big boys are not buying into this stock, it can only mean two things: Valuetronics will be badly hit by the trade war or investors are seriously undervaluing this stock.

Venture is trading at 11.7x historical PE while Valuetronics is valued at less than 3x historical PE (ex cash). Well?

 

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