TECHCOMP reported a 38.2% jump in full-year net profit to US$6.0 million, either meeting or exceeding forecasts by six analysts.
More interestingly, Techcomp – one of the best-covered small caps on the Singapore Exchange - expressed optimism that its sales and bottomline will continue to grow this year.
It is a reiteration of its past announcements that it can grow its sales at least 20% a year for the next three to five years.
"Our business is resilient, and with the projects on hand, the order book on hand, we are confident we can maintain the growth," said Richard Lo, its president, at a briefing yesterday (Feb 26) for some 20 analysts and fund managers at Raffles City Convention Centre.
For FY ’07, Techcomp has recommended a first and final dividend of S$0.012, unchanged from the previous year.
That translates into a dividend yield of 2.79%, based on the stock’s recent trading price of S$0.43. Its PE ratio based on last year's earnings per share works out to be around 7X while its market capitalisation is around S$67 million.
Some highlights of the FY ‘07 results of Hong Kong-based Techcomp (www.techcomp.com.hk), a leading distributor and manufacturer of proprietary high-tech scientific equipment in China:
| 2005 | 2006 | 2007 | Change % (FY 07 vs FY 06 | |
| Revenue (US$’000) | 44,617 | 54,842 | 65,819 | 20.0 |
| Net profit (US$’000) | 3,687 | 4,350 | 6,011 | 38.2 |
| Net profit margin | 8.3% | 7.9% | 9.1% | N.A. |
| EPS (US cents) | 2.73 | 3.22 | 4.30 | 33.5 |
Research house | Forecast FY ‘07 net profit* | Forecast FY ‘08 net profit* |
NetResearch | USD 5.9 million | USD 7.9 million |
Westcomb Research | USD 5.8 million | USD 7.8 million |
SBI E2-Capital | USD 5.9 million | USD 7.8 million |
Kim Eng Research | USD 6.0 million | USD 8.1 million |
CIMB-GK | USD 6.0 million | USD 7.5 million |
Lim & Tan | USD 6.0 million | USD 7.8 million |
*Forecasts made prior to the release of FY ’07 results.
Techcomp’s main market is China, where it derived 82% of its sales in FY ‘07. Its sales in China grew 21.7% last year, propelled by customers who are mainly PRC-government funded, so debt collection is not an issue, said Richard.
In Singapore, Techcomp's customers include the National University of Singapore.
Revenue was divided between distribution activities (83%) and manufacturing (17%).
For further information on the results, please read Techcomp’s announcement on the SGX website.
In the meeting with analysts and fund managers yesterday (Feb 26) and in a media release, Techcomp’s management painted a strong outlook for its business this year.
“2008 promises to be a bright year for us, with several of our new products expected to go into production, such as our consumables and safety cabinets,” said Richard.
Techcomp began manufacturing consumables for gas chromatography in the last quarter of 2007, so this year will be the first full year of contribution from this higher-margin business.
Techcomp is the market leader in gas chromatograph in China and has a network of customers to market its consumables to.
While manufacturing of equipment chalks up a 50% gross margin, consumables can command a 70% gross margin, said Richard.
The margin reflects the fact that consumables is a segment with high barriers to entry, he added. “We had to build up our reputation and technology over the years.”
On Techcomp’s confidence in winning customers, Richard said scientists and engineers are conservative people, preferring instruments or suppliers that have proven to be reliable.
Market demand for testing equipment has been stable and growing, and is expected to continue to be so. In China, it is growing at 15-17% a year, and will be underpinned by recent health issues concerning environmental pollution and food safety.
China’s Ministry of Health, for example, is buying high performance liquid chromatographs to check pollutants in rivers.
Strategic ventures with European players
Besides growing its business organically, Techcomp aims to expand into Europe through strategic ventures with players there.
One possibility is for Techcomp to provide OEM services to European players. Techcomp’s plant in Shanghai, which was bought at the end of 2006, can accommodate three or four times the current level of production, said Richard.
Techcomp's OEM services are an attractive proposition as can be seen in the case of US bio-safety cabinets company Nuaire, for whom Techcomp will start manufacturing this year.
Nuaire faces high labour cost in the US (5X 
Given its large spare production capacity, Techcomp has no need for major capital expenditure for organic growth this year or next year, said Richard.
Challenges it faces include an appreciating renminbi vis-à-vis the US$ in particular, and rising inflation in China.
To counter these, Techcomp is introducing new higher-margin products, improving efficiency and achieving greater economies of scale, said Richard.
Asked if Techcomp is affected by rising raw material costs, Techcomp executive director Eric Chan said raw materials do not make up an important portion of overall cost for high value-added products. “There is cost pressure but not to the extent it has on manufacturers of products such as garments and shoes.”
*****
This morning, CIMB-GK analysts Jacky Lee and Jonathan Ng issued a report with a "buy" recommendation on Techcomp and a target price of 82 cents, based on 10X their forecast 2009 earnings per share.
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