IN A TELECONFERENCE yesterday (Mar 9), three analysts from Singapore sought to understand the business of Techcomp Holdings (which has just reported a record US$10.5 million net profit) via a different channel.
They spoke to a major (9.02% stakeholder) and long-time shareholder, the US-based Kabouter Management which scored a major success last year with its 5+% stake in Thomson Medical. The hospital operator was taken private by 'ex-remisier king' Peter Lim at a hefty premium to its traded price.
Nikhil Rastogi, an analyst at Kabouter, and Aditya Eachempati, a fund manager of Kabouter, fielded the questions from the analysts for an hour.
Kabouter has assets under management of USD 250m. It is a long-only fund that focuses on small to micro-cap companies, and counts half a dozen SGX-listed companies in its portfolio.
Q. Why did you buy Techcomp?
A: The Company is involved in the analytical equipment business for laboratory and industrial uses. We believe that in the coming 10-20 years, as the PRC increases its manufacturing activities, the industries will require more analytical and testing equipment. The market will get bigger.
The second reason is that Techcomp's management has been in place for more than 20 years now and they are doing the job well. We have spoken to their principals in Europe.
They told us that they have problems selling their products in China. They felt that Techcomp has probably the best distribution capability in China and they are very happy with the results so far. We think the market has undervalued the management in this regard.
We also feel that the valuation is cheap based on the performance in China. The business outside of China is a bonus to us.
Q. Why do you think the market undervalues the Company?
A. There are several reasons. One of them could be the unstable earnings pattern of the Company. They made some mistakes a few years ago and lost money in the currency exchange but they have rectified that problem. This type of hiccup is common among micro-cap companies. Another reason is that this is really a small company and many funds may not look at companies of this size. Lastly, there is some corporate governance issue with Chinese companies listed in Singapore and many investors have avoided these companies. But we are comfortable with the management.
Q. Have you talked to their PRC customers?
A. No, not yet. We have talked a lot to the European companies that use Techcomp’s products in China. The feedback has been positive.
Q. There are concerns about Singapore-listed companies buying overseas companies. In the past, companies like OSIM have not been successful with such acquisitions. What is your take on this?
A. We were shareholders of OSIM previously and we also did not understand the rationale for the acquisition. It seems more like a bargain deal to us. Having said that, Techcomp has worked with the two European companies it acquired for a very long time and they know the business inside out. So the management is comfortable with the acquisitions.
Q. What about the labour laws in Europe? The companies find it hard to sack poor-performance workers. Will that have an impact on the Company?
A. We cannot say for sure what the impact is. What we know is that Techcomp is trying to reduce their costs by helping the companies to source for components in bulk. They are also distributing their products in China to improve sales. Our understanding is that the European acquisitions target to breakeven by this year.
Q. What is your opinion about the dual listing plan in Hong Kong?
A. We have spoken to other fund managers in US. Our understanding is that the Chinese companies in Singapore do not command good valuations due to the corporate governance issues. At this moment, we haven't decided whether to continue to hold shares in Singapore or to buy shares through the Hong Kong listing.
Q. What do you think are the catalysts for this Company in the near term?
A. Well, we certainly feel that the operations from Europe will turn in a better performance and that should boost the Company’s performance. In addition, we believe that the Company has worked hard to transform itself in the past 5 years, We anticipate 2-3 years of stable earnings growth for the Company.
Q. What are your concerns for the Company?
A. Our primary concern is whether the Company has the ability to pass on costs to the customers. If the Company shows a weakness in passing on inflation-related costs to their customers, it shows that they have weak pricing power and are subject to market volatility. So far, the Company has demonstrated that it does have pricing power. Our other main concern is the entry of more competitors into the PRC market. We do know that the competition can be very fierce in China and it may affect the Company’s margins.
Q. How long have you been holding Techcomp’s shares? Do you intend to sell?
A. We started buying the shares 4 years ago and have been increasing our stake. We have risk management requirements which limit the percentage of stake that we own in Techcomp as a portion of our portfolio. We currently do not have an intention to sell.
Q. What can you say about the liquidity problem of Techcomp shares?
A. I guess the liquidity problem does not affect us as we are a long-fund and we do not have that many trading activities. We are happy with the dividends that the management gives out every year. If the Company continues to deliver results, the market will come to appreciate this Company better.
a) TECHCOMP: Record profit of US$10.5 million in FY2010, Europe to contribute to bottom line this year.