Joe Ong, 26, is an engineer by profession. He is a value investor who firmly believes that investment is most successful when a businesslike approach is adopted. Check out his investment blog http://joe-ong.blogspot.com
TIMES ARE chaotic as financial institutions worldwide are riddled with the side effects of toxic debts, and the entire stock market is soaked in unprecedented fear. This is perhaps one of the best times for a value investor to pick up some bargains.
In classic Buffett approach, I read online investment forums and annual reports, visited companies and interviewed CEOs.
It was not long before I stumbled upon Adampak, which seems to have significant potential to become a shining star in the near future. I have since become a shareholder.
Company Synopsis
Adampak started life in 1979 and was listed on the Singapore Exchange in 2004.
It specializes in manufacturing labels for all products, ranging from serialized barcode, generic paste-on labels, tamper-proof labels, specialized labels for use in electronics, insertion of Radio Frequency Identification (RFID) tags into labels.
Adampak has manufacturing facilities in Singapore, Philippines, Thailand, Suzhou, as well as a wholly-owned subsidiary Aident in Malaysia and China.The company has a lot of large MNCs on its customer list which include giants like HP, Fed-Ex, DHL, Seagate, Western Digital, etc. Several of them have been using Adampak’s products and services over the last 20 years.
Adampak has consistently maintained a high level of profitability for the last 7 years. Although there’s no formal dividend policy, the company has unfailingly distributed a significant percentage of its profits with all shareholders.
An Interview with the CEO
I met up with Adampak CEO Mr Chua Cheng Song on 29th August at his office at Loyang Way. I had a good conversation with him on different aspects of Adampak.
Business strategy
1. Gun for big deals from the MNCs
Mr Chua revealed that Adampak's business strategy is to focus on securing contracts from big time multi-national corporations and establishing its reputation among them. Business from other MNCs will then automatically come through referrals etc.
There are two key benefits: firstly, Adampak can ride along on the bustling growth of the MNCs; secondly, increased resilience to regional economic impact. In 1997 when Asia was struck byh the financial crisis, sales of Adampak continued to increase at double digit growth simply because a bulk of Adampak's sales went to US and European MNCs.
2. Establish a local presence
In Mr Chua's words, "In this competitive industry, the first one in, wins." In the manufacturing industry, for customer companies to engage a manufacturer, they have to first go through a lengthy qualification process to assess whether the manufacturer is up to standards and can match their requirements.
It is after the qualification process that the manufacturer will stand a chance at gaining a part of the contract. A local presence has helped Adampak secure more customers who have qualified its plant.The best example is China, where Adampak set up a factory in Suzhou Industrial Park alongside many MNCs and it has an added proximity advantage over label suppliers based in South-East Asia.
In many ways, this move has helped to increase the list of customers who qualified Adampak's plant. In recent months, the number of suppliers based in China has increased sufficiently for a break even point to be achieved at Adampak Suzhou. And it is expected that the number of qualified suppliers will grow.
3. Build strong relationships with suppliers to achieve a preferred label converter status
Over the years, Adampak has forged strong relations with their suppliers. Today, Adampak is a preferred label converter to 3M, which will recommend their clients to adopt Adampak's services. This further lends credence to Adampak's reputation and opens up an additional revenue stream.
4. Build a strong reputation for quality, reliability, consistency in service delivery
At first glance, it appears that anyone can print labels. But to be able to do so consistently is an immense challenge. Over the last 20+ years, Adampak has built a strong brand of being able to consistently deliver high quality products on schedule. The brand is there, and the big corporations like HP, FedEx, Seagate, P&G, major telcos, etc. all know Adampak for its ability to consistently deliver at the lowest cost. It was also revealed that HP has been using Adampak's services for the last 20 years. How amazing for a little factory that started in Loyang Avenue!
On growth drivers
RFID
"RFID faces a chicken-and-egg problem. No one wants to take the lead in adoption; everyone just wants to be the follower of a tried, tested technology," said Mr Chua. The history of barcode labels is a very good case study. It used to be very expensive in the early phases of industry adoption and every company only started to catch on the wave when major players started using it and costs concurrently went down. Likewise, RFID in 3rd Party Logistics will definitely come as the next big wave as it greatly simplifies inventory management.
On competitors
According to Mr Chua, it is hard to claim that Adampak is the industry leader in South-East Asia because the coverage is just too difficult to ascertain. There are so many companies operating in a similar fashion in the region, and all are covering different scopes with different strategies. Just to name a few, like Brady, Zephyr (these I know) and ITW, etc. I would estimate there are 10 odd competitors in this industry.
Nonetheless, Adampak is certainly no small player here. Mr Chua shared that a lot of MNCs know Adampak when it comes to die-cut products and high-end labels, and companies acknowledge Adampak's reputation for a consistent delivery of quality products. This is a good sign of a company that probably counts as the top few of the list.
On production capacity and ability to scale up rapidly
Adampak's factories run 24 hours shift. Mr Chua said, "In this industry, there's no way you can survive if you work only on 1 shift". The plants run at full capacity for 5 full working days, and during peak periods, the staff works overtime. Clearly, Adampak is running at maximum operating capacity, with little evidence of any excesses.
One of the critical success factors for the manufacturing business is the ability to flex and scale up production capacity rapidly within a very short notice. If a company does not have strong processes in place, achieving a rapid scaling up will not be possible. Mr Chua shared that Adampak has the ability to set up new plants, new factories and get them up and running in a matter of 2~3 months.
Financial prudence
Mr Chua shared that the management closely watches the returns on equity. In addition, the company practises financial prudence because the management is always fully cognizant of the risks involved in credit calls when banks face a liquidity crunch. Adampak has consistently maintained a high current ratio (current assets over current liabilities), whereby the short-term borrowings and liabilities are well within the company's capabilities to repay within a year.
Good cashflow management
He also mentioned that Adampak happens to be doing well in this area and is very fortunate because "the customers see the company not as bankers", and their clients have been very prompt and regular with their payments. This is another sign of a well managed business where the company has a very strong relationship of trust and goodwill with their clients.
On employees
Giving where credit is due, and striving to reduce employee turnover to a minimum
Adampak's management strongly believes in rewarding employees for their efforts. This could probably explain why admin expenses generally rose in a 1:1 ratio to revenue, while maintaining a very strong ROE. And this principle has done Adampak a lot of good. Mr Chua shared that it's a well known fact that "Adampak has one of the lowest employee turnover rates around".
This is comforting, because with a HR policy that focuses on rewarding good managers for their efforts, I do not have to worry about excellent managers being poached by other companies.
On management succession planning
To my question regarding management succession planning, he mentioned that this has already been put in place. As for importing foreign talent, Mr Chua said that the issue is not foreign talent but finding the right man for the right job. He is confident that if he is not around, his managers can step up and run the company as well as he does.
On the board of directors
A strong representation of independent directors with experience across multiple industries
Mr Chua also shared that the representation of solid independent directors who hold concurrent appointments on other companies' board helped a lot. The executive management has received good advice from these people who are able to draw on their industry experience.
My final remarks
From a financial perspective, based on a discounted cash flow method, the intrinsic value of Adampak is estimated to be at least S$0.35, which is much higher than the current share price of S$0.22. There is a significant margin of safety here. Moreover, the net asset value approximates S$0.18 cents per share. Its current significant exposure to the electronics industry will also mean that it may ride along the economic cycles, but industry giants like HP and Seagate are not likely to go out of business.
From a people perspective: it is well managed by a strong team, and this is validated by every aspect of my encounter with Adampak - from my request for AGM minutes, to my meeting with the CEO, to posing as a customer to test the sales staff competency, to warm customer service officers who gladly brought me around the factory floor to see a group of workers who are going about their tasks professionally. The team has not failed my expectations thus far. The management is financially prudent, and people like Mr Chua come across as a forthcoming person and astute businessman.
