In 2017, all the potential superstocks so far are companies listed on the Singapore stock exchange. This week, the trends continue with the ...

Weekly Superstock Scan 20 Feb 2017 - 24 Feb 2017: Valuetronics Holdings Limited (Singapore)

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In 2017, all the potential superstocks so far are companies listed on the Singapore stock exchange. This week, the trends continue with the only potential superstock being another Singapore stock - Valuetronics Holding Limited (SGX:BN2).

This does not mean that I have given up on US stocks. This week, ELMD and SDGE did pass the technical scans, but their latest quarterly results were not good enough to pass the fundamental screen.

Valuetronics, more accurately speaking, is a Hong Kong company listed on the Singapore Stock Exchange. It focuses on the design and development of consumer electronics as well as industrial and commercial electronics products, with core competencies ranging from tool fabrication, injection moulding, metal stamping, machining, surface mount technology (“SMT”) and finished product assembly on full turnkey basis.

Valuetronics classifies its EMS business into 2 reportable segments, namely consumer electronics products (CE) and industrial and commercial electronics products (ICE). 

Technical



Valuetronics has been trading in a tight range between $0.50 to $0.55 since November 2016. Upon the release of the third quarter result, the stock price surged from $0.57 to $0.66 last week. The volume of shares traded last week was 14 million shares, approximately 4.5 times its average weekly trading volume.

Fundamental



Including the most recent quarter, Valuetronics reported two consecutive quarters of year on year EPS growth. This reverses the downward trend in EPS that began near the end of 2015.

Entry into Smart Consumer Electronics

In Q3FY2016, Valuetronics exited from the mass-market LED lighting. Leveraging on its manufacturing expertise in LED products, Valuetronics entered into the mass production of wireless lighting products with smart control features. Presumably this refers to the Philips Hue smart bulbs.


The introduction of wireless lighting products is the main driver for the surge in revenue for its CE segment, which increased 92% year-on-year.

Opportunities Within Automotive Industry

While Valuetronics has already reaped the benefits of entering the wireless lighting product market for the CE segment, things are not that clear for the ICE segment. In FY2016, Valuetronics acquired its first customer in the automotive industry, supplying data and media connectivity modules to the customer.

Valuetronics is in a good position to ride on the rise of in-car connectivity. It is poised to add a new customer to its automotive segment in the middle of the year and expand on the range of products that it supplies to existing customers in the automotive industry.


Matrices
- Relatively large float of 261 million shares, approximately 400 times its average daily trading volume.
o Following the surge in price, Valuetronics is trading slightly above 10 times its trailing twelve months EPS

Risk Factors/ Things I do not like


  • Competition from cheaper Chinese products - Previously when Valuetronics first started their mass market LED light bulb business, margins and volume were good. However, aggressive price competition and margin erosion caused the business to be unprofitable. Similarly, the wireless lighting business will face competition from Chinese competitors and face margin erosion. Assuming that Valuetronics is producing for Philips, an obvious competitor will be Xiaoyi whose Yeelight serves similar function as Philips Hue and retails at a much lower price.

  • Rising labour cost - Valuetronics' plants are mostly in the PRC where labour cost are rising due to annual minimum wage increases. Valuetronics have attempted to mitigate this risk factor by using automation, lean manufacturing practices and Manufacturing Execution Systems to drive productivity and efficiency.




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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.