The rally was strengthened after its announcement of its 1Q result and a surprise interim dividend, lifting the stock to 25 cents or so recently.
That's PE of 4.4X, which most investors would consider to be attractive, especially considering that Dutech had RMB127 million in net cash (7.1 SGD cents per share) as at end-1Q.
For investors with long memories, the stock was listed in Singapore in 2007 at 33 cents.
Thus after 7 years, and an enormous increase in Dutech's yearly earnings (RMB100.4 m last year vs RMB65.3 m in 2007), the stock can still be had for 24% lower.
Those who have held the shares since IPO would have been rewarded with a total of 6 Singapore cents a share in dividends, though, inclusive of the 1-cent interim dividend to be paid later this month.
Dutech Holdings (recently 25.5 cents) has a market cap of S$91 million and its stock trades at a trailing PE of 4.4X and dividend yield of 3.9%. Chart: Yahoo FinanceAt heart, Dutech is a manufacturer of safes for global companies that, in turn, produce ATMs.
This is a niche business serving only a handful of big global players. That's why, for Dutech, out of RMB968 million of revenue in 2013 from the safes business (aka 'high security' segment), three customers accounted for RMB565.5 million, or 58%.
Dutech manufactures safes from its plant in Nantong, China. The business requires, among other things, substantial engineering know-how, which is available in abundance at relatively low cost in China.
This cost advantage has enabled Dutech to gobble up market share from competitors which operate out of Europe and the US.
Dutech expanded its market by acquiring, in 2011, one of these companies which was loss-making, Format of Germany. The acquisition was not so much for its production capacity but for its technological expertise, brand and sales channels.
We have covered some aspects of Dutech in a recent story which highlighted the emergence of Robert Stone as a substantial shareholder and as the No.4 largest investor: DUTECH HOLDINGS: Robert Stone Continues To Add Shares To His Holding
Following on that article, we had a telecon last week with Dutech's CFO Walter Cao, a Singaporean who is based in Shanghai where Dutech has its headquarters.
Here are key takeaways:
Dutech Holdings' range of gun safes and safes for commercial and residential premises. Photo: Company.
1. Boom in sales of gun safes: Though Dutech's core business has long been the manufacture of ATM safes and gun safes, the acquisition of a key customer for gun safes has broadened Dutech's earnings base significantly in the last two years.
The principal market is the US.
Gaming machines and ticketing machines too could emerge as significant contributors in the near term for Dutech.
These are natural product extensions as they share some key commonalities with ATM safes in the production processes.
The new products, however, are not likely to command as high a gross margin (undisclosed) as ATM safes due to higher costs of raw materials and components.
2. Steady double-digit growth in ATM safes: The global market grows at a single-digit rate but Dutech's sales of ATM safes have grown at double-digit rates, which means Dutech has gained market share.
In China, Dutech supplies the safes to Wincor-Nixdorf's plant which produces entire ATMs for markets worldwide.
Adding to the topline, Dutech's 100%-owned subsidiary in Germany, Format, contributed about RMB150 m in sales (in Europe) last year and has turned profitable as well as cashflow positive.
The industry is fragmented. Compared to its smaller peers operating in the West, Dutech enjoys economies of scale as well as lower labour costs, in particular, for engineers. This is not a labour intensive operation but one that requires much engineering know-how.
![350johnny_liu[1]](/images/stories/Dutech/350johnny_liu%5B1%5D.jpg)
Dr Johnny Liu, executive chairman & CEO of Dutech Holdings, owns a 43% stake in the company. File photoThe locks of ATM safes are a key feature which Dutech leaves to specialist producers. The main item in Dutech's cost of goods sold is steel.
Can Dutech pass on any significant increase in steel cost to its customers?
The company negotiates its selling price of safes on a yearly basis, taking into account the projected steel price movement. Dutech also does hedging on the cost of steel.
By the way, contrary to what you might think, safes are more than just steel plates cut and welded together.
Designs of safes are complicated as several other materials are used in producing safes -- cement, iron fibre, steel balls and glass -- in order that they can withstand attacks by criminals intent on extracting money and other valuables from within.
3. Expanding manufacturing capacity: Dutech currently has the capacity to manufacture about 350,000 safes a year in Nantong, compared to 60,000 in 2006, the year before its IPO.
Dutech is the largest manufacturer of ATM safes in Asia. The utilisation rate of its factory last year was about 95%.
Aside from ATM safes, Dutech also produces commercial safes, which account for peaks and troughs in Dutech's business. 2Q and 3Q are usually peak seasons for Dutech.
Revenue-wise, ATM safes account for about half while other types of safes (gun safes and commercial safes) account for the rest.
Dutech has completed the building of a plant in Sutong Science & Technology Park which is scheduled to start production in 4Q this year. The company is considering moving there the production of high-tech products such as gaming machines from its plant in Nantong.
The freed-up capacity in the Nantong plant will be used for producing safes.
Dutech is entering the gaming machine market and reckons its upside is substantial. Photo: Company
4. Gaming machines -- new engine of growth: The market for these machines is huge, and Dutech is gaining a foothold as it leverages on similar know-how used in the manufacture of ATM safes.
Gaming machines are set to become a new core business which will be supported by its new plant in Sutong Science & Technology Park.
Since last year, Dutech has been achieving rising sales to a major customer. Its identity and the exact sales figures are not disclosed.The gross margin for this OEM work -- whereby the customer does the design and Dutech does the production -- is 'decent' but lower than that for ATM safes. (Collectively, Dutech's various categories of safes commanded a gross margin of 21.4% in 1Q this year.)
Extending its core competence to yet another new product line, Dutech is exploring the manufacture of ticketing machines for rail systems. Small maiden sales could materialise this year.
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