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Heng's speech lifts Creative's share price, but earnings recovery yet to materialise

Chan Chao Peh

SINGAPORE (Feb 25): On Feb 18, Finance Minister Heng Swee Keat took two hours to deliver the 2019 Budget speech. After Heng lauded the entrepreneurial grit of Creative Technology’s founder and CEO, Sim Wong Hoo, its shares jumped 3.6% in just 10 minutes.

Sim, who enjoyed success in Creative’s early years, has struggled to consistently deliver hit products — until perhaps recently. “I am happy that Mr Sim and his team are at the cusp of a major breakthrough. And I wish them every success,” said Heng, referring to Creative’s Super X-Fi advanced audio technology that was recently commercialised.

Heng delivered his closely followed Budget speech during market hours, and Creative’s shares surged from $4.69 to $4.86 at 4.26pm, ending the day at $4.85, or 3.4% higher.

However, is this praise from Heng, widely tipped as Singapore’s next prime minister, sufficient to boost Creative’s share price further? Has the share price run ahead of earnings for the loss-making company?

On Feb 14, Creative reported that for the three months ended Dec 31, 2018, it suffered wider losses of US$4.9 million ($6.6 million), compared with red ink of US$4.2 million in the year-earlier quarter. Revenue in the same period declined 22% y-o-y to US$16.2 million, which the company attributed to “uncertain and difficult market conditions”.

Creative expects to post an operating loss again in the current quarter, as the overall market for its products remains “challenging”. “Revenue contribution from Super X-Fi products for the quarter is not expected to be significant to the overall revenue for the Group,” the company added.

What exactly is the Super X-Fi? Simply put, it is Creative’s own audio technology that offers a surround-sound-like listening experience using earphones. Some reviewers have compared the audio experience to a “live” performance. Sim, in a series of interviews given early last year when the Super X-Fi was introduced, likens the improved audio experience to the switch from watching black-and-white TV to colour TV.

When the market caught on to the Super X-Fi hype last February, Creative’s share price surged on high volume from $1.25 on Feb 22 to as high as $8.75 on March 5. Buyers who jumped on board then might have bought the shares offloaded by Ng Kai Wa, Sim’s co-founder at Creative.

On March 5, Ng sold 104,350 shares at an average price of $9 each; the following day, he sold another 95,650 shares at a slightly higher average price of $9.08 apiece. Ng, who has not traded Creative shares since, is still holding on to nearly 2.15 million shares, or 3.055% of the company, down from 3.191%. By March 8, Creative’s shares had corrected to below $6 and were down further to around $5 by end-March. They have traded at this level ever since.

Last September, Creative started selling the SXFI Amp, a headphone amplifier shaped like a cigarette lighter that can be used to connect users’ earpieces for the surround-sound experience. Last month, the SXFI Amp, with a list price of $199, was offered as a bundle with a set of Creative earphones for $229. Two other headphones with SXFI technology have since been introduced: one listed at $219 and the other at $179.

Last September, KGI Securities analyst Marc Tan estimated that Creative could sell around 40,000 units of Super X-Fi-related products within the first year of launch. This will translate into US$6 million in revenue. Tan, who in February 2018 was the first sell-side analyst to put out a research note, albeit non-rated, on the Super X-Fi, is keeping his estimates for now.

While launching its own Super X-Fi products is a start, Creative sees bigger revenue potential licensing out the technology to other brands. In a Jan 14 press release, Sim claims that “many large OEM partners are pushing us to integrate the Super X-Fi into their products as soon as possible. This will be an exciting new phase for us, as the OEM market is potentially hundreds of times larger than the market for Creative’s Super X-Fi products”.

Will Creative, which has been suffering from declining sales and is loss-making, finally turn around? KGI’s Tan is reserving his views for now. “I do not expect the company to turn around unless sales momentum in Super X-Fi picks up,” he says.

Even when Creative was incurring losses, it continued paying dividends of five cents a share, thanks to its sizeable cash balance held since its better days. As at Dec 31, 2018, the company had cash of US$103.4 million, down from US$114.8 million as at June 30, 2018. With a total share base of 70.3 million shares, that implies cash per share of US$1.47.

However, since FY2015 ended June 30, Creative has stopped paying dividends. Tan does not believe Creative will draw on its cash reserves and resume paying dividends to help support the share price while waiting for Super X-Fi sales to kick in meaningfully. “The cash hoard is justified, as they will need the cash to mitigate cash burn, as well as to fund Super X-Fi’s development and marketing expenses. They have done a great job in keeping the balance sheet strong,” he says. Besides a deferred tax liability of US$10.4 million, Creative has no other long-term debt.

In his speech, Heng described how Creative had spent US$100 million on R&D over the past two decades. The resultant trove of intellectual property has led to not just the Super X-Fi but also other technologies, which Creative has patented. Over the past couple of years, the company’s lawyers have been actively asserting their rights, going after other companies ranging from Nvidia to Samsung Electronics for alleged intellectual property infringement and there have been a string of wins.

In the most recent instance, on Feb 9, Creative announced that its wholly-owned subsidiary ZiiLABS had settled certain patent infringement lawsuits filed in the US. Creative will be recognising the settlement sum of US$17.9 million this current quarter, which will make the three months to March 30 a profitable one. Without that money, the company would have remained in the red.

Creative, however, cannot rely on the enforcement of patent rights to generate earnings continuously. A minister helped  lift its share price briefly, but for a greater certainty of a turnaround, much will depend on the company rolling out the Super X-Fi deftly.

This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe here