Recently, Shares Investment had the opportunity to catch up with the chairman and managing director of Valuetronics Holdings, Ricky Tse Chong Hing, in an exclusive interview following the company’s sterling financial performance for the full year ending 31 March 2012.
The leading integrated electronic manufacturing services (EMS) provider of original equipment manufacturing (OEM) and original design manufacturing (ODM) has probably turned heads as it announced results ahead of expectations while many other manufacturing firms struggle in the midst of the prevailing Euro crisis and the slowing growth concerns in United States and China.
Valuetronics turned in a report card showing a 7.5 percent increase in full year earnings to HK$130.3 million on the back of a 20.7 percent jump in revenue, which crossed the HK$2 billion mark for the first time. Tse shared that the strong performance was led by significant growth from its major OEM customers which contributed the bulk 59.1 percent of its top line despite weakness in its ODM segment. “The company has also maintained a healthy profit margin of around 15 percent over the past four years, having successfully sustained a reasonable margin for various products’ contract manufacturing,” Tse proudly said.
Undeniably, the highlight of Valuetronics’ report card was its declaration of record dividends. The HK$0.17 dividend for FY12 includes a special dividend of HK$0.01, and translated to a yield of 11.2 percent as at its closing price of $0.25 on 11 June.
“Although the company has been consistently giving out dividends since its listing in 2007 with a payout ratio of more than 30 percent, the recent two years’ payout has been above 40 percent, with FY12 at more than 46 percent,” highlighted Tony Kwong, the group’s financial controller. Noting the trend, CIMB Research also projects a payout ratio at 42 percent for Valuetronics from FY13 to FY15, with yields to range from 11.4 to 13.2 percent. Not only are the attractive yields grabbing our attention, the company’s sound business model certainly promises its shareholders even more.
Capability Above All
While Tse noted that business outlook for Valuetronics continues to be a delicate balance between maintaining strong sales and lowering costs, the company already has in place, strategies aimed at increasing efficiency and reducing costs.
One of its key improvements, Tse remarked, is its lean manufacturing programme set up to improve productivity of its employees and eliminating non value-added activities through system automation to curb rising costs such as the minimum wage imposed nationwide in China.
On its sales side, vertically integrated Valuetronics provides the full spectrum of services from designing and manufacturing to finished product assembly. Leveraging on its existing capabilities and expertise in design and manufacturing, Valuetronics moved up the value chain in 2010 to set up a brand licensing segment, which saw its top line from the segment jump 170.4 percent in FY12.
Its brand licensing segment currently holds exclusive rights to use “Whirlpool”, “Maytag” and “Amana” brands, for a portfolio of appliances such as the air purifiers, electric fans and heaters, which the company has plans to roll out a number of new products. Although CIMB pointed out that Valuetronics’ licensing business has yet to breakeven and could take longer than expected to do so, UOB-Kay Hian noted that operating losses would likely narrow and sales in the segment to rise in FY13.
Furthermore, being a small to medium sized contractor has its advantages. Tse added, “Valuetronics has the flexibility to support a customer-oriented approach and maintains a strong partnership with its customers. In doing so, Valuetronics has been able to react timely and quickly to its clients’ needs in view of the changing consumer demands.”
This can be seen as many of Valuetronics’ valued clients have been with the company for many years. Notably, Tse is happy to grow with its major client, Philips that drove its major OEM business. He commented that the volume generated for the company helped cover operational costs although margins are less attractive than that of its licensed products.
Striving On Diversity
With research houses like OCBC Investment expecting growth momentum from its largest customer, we quizzed Tse on the aspect of potential concentration risks. Tse confidently expressed that that company has shown resilience with its strong clientele base and the ability to innovate. “Valuetronics offers a diversity of products for commercial, industrial and consumer use, distributed by multi-national companies worldwide – even Philips, as their largest customer, has business units operating in different industries such as lighting and consumer electronics,” Tse said.
Elaborating further, he acknowledged that Valuetronics’ growth is not totally immune to the slowing economic activity and woes of reducing demand, but emphasised that the globally distributed and well-diversified nature of its products would help to cushion any negative impact. Of course, Tse highlighted that continuous pursuit of new prospective clients would be a priority to Valuetronics to ensure greater diversification of its business.
Riding on this continued growth of its wide client base and Philips, especially in the LED lighting business, as well as its licensing segment on the back of efficient cost management, UOB expects a 5.9 percent year-on-year growth in earnings in FY13 for Valuetronics.
Indeed, capability is Valuetronics’ key to success. Three brokerage firms, CIMB, OCBC and UOB has all rated Valuetronics “Buy”, highlighting optimism on the future prospects of the company.