Republished from ThumbTackInvestor with permission

This has gotta be one of the most well managed, yet low profile company on SGX. Well, at least until recently when analysts finally started reporting on it. I was hoping to accumulate more but with the recent huge run up in the share price, I guess I’d have to reanalyze and rethink my position.

This company is technically a S-chip. It is so low profile, that if you google “Dutech Holdings”, you can’t even find its website. Instead, its website is named under “Tristar Group”: http://www.tristarinc.com/our-company/company-profile.html

I bought 570,000 shares in April 2015  at $0.275 and it currently makes up approximately 16.5% of my portfolio. My biggest mistake with Dutech was that I did not buy more.

Since the start of 2016, Dutech has finally started realising its potential, and the rise seems set to continue.

48) Dutech holdings share price 03062016

 
Brief Background

Dutech is Asia’s largest safe manufacturer in terms of sales and production capacity. They are also one of the few global players who are both UL and CEN certified, with their production bases in China and Germany. Its key products include ATM safes, gun safes, commercial safes and cash handling systems.

There are 2 main divisions: High Security segment (which manufactures ATMs, gun safes, commercial safes, cash handling systems and gaming terminals), and the Business Solutions segment (which manufactures intelligent terminals and electro-mechanical equipment to semi-conductor, printing and automotive industries)

Dutech’s clients include Hitachi, Diebold Nixdorf,Liberty Safe & Security Products Inc., Tractor Supply Co., Costco Co., Glory Ltd., SGI, Bauhaus, Schaefer Shop, Trumpf, and Amada.

53) Dutech products 06062016

Recent Developments

In 2011, Dutech acquired Format, which was Dutech’s competitor. After the acquisition, Dutech set about integrating the loss making company and in a short 3 years, managed to finally make it profitable.

Dutech then embarked on yet another acquisition in 2014, this time acquiring Deutsche Mechatronics GmbH (DTMT), a manufacturer as well as provider of drying solution for graphics and printing industries, intelligent terminals, visual quality control machines, and other sheet metal products.

DTMT has allowed Dutech to further enter the intelligent terminals business. (under Business Solutions segment)

Most recently, in Dec 2015, Dutech bought Krauth from Nussbaum Technologie for 220k euros. They also bought the know-how for 250k euros, and invested a further 2.02mil euros into Krauth. Krauth, established in 1926, is a developer and producer of solution products such as Auto-Ticketing Machines and Money Changers.

It is clear to me that Dutech is pushing for growth into the intelligent terminals sector. This is a sector which is relatively niche, and with their crafty acquisitions, Dutech has carved out a space for itself in this sector. Dutech has also shown that they are able to assimilate and turn around acquisitions, something which is crucial for companies that are growing inorganically.

With proper integration, the acquisition can then contribute positively to earnings under the umbrella of companies. Each of Dutech’s acquisitions bring some additional know-how to the table, and increases Dutech’s competitive moat.

Another point to note is that Dutech’s sales are mainly in USD, while their costs are in RMB. Hence, a strengthening USD environment vs the RMB is hugely beneficial to Dutech.

Competitive moat

57) Dutech competitive moat.jpg

UL and CEN certified production is IMO, a major competitive edge for Dutech. Afterall, manufacturing typically has relatively low barriers to entry and anyone can copy that. But getting UL and CEN certification is not easy, and requires substantial investments. UL certification for example, is a fairly long process which can easily take several months to complete. A clear sign of how hard it is to get both UL and CEN certification is the fact that Dutech remains one of the few safe manufacturers that are dually certified.

This is a chart showing how the process of getting UL Certification:

54) Dutech UL certification Simple_Project_Process.gif

On top of this, Dutech’s acquisitions have given them valuable know how in the intelligent terminals sector. Manufacturing of such intelligent terminals requires specific industry knowledge, expertise and personnel. All of which would mean that competitors would find it hard to undermine Dutech.

Income Statement

(RMB'000) FY11 FY12 FY13 FY14 FY15
Revenue 428,762 711,707 1,027,584 1,050,913 1,193,748
Cost of Sales -334,489 -556,666 -783,991 -794,269 -851,838
Gross Profit 94,273 155,041 243,593 256,644 341,910
GPM (%) 21.99% 21.78% 23.71% 24.42% 28.64%
Net (Loss)/Profit After Tax 34,052 40,270 100,357 142,697 118,000
(Loss)/profit attributable to: Equity holders of the Company 34,052 40,270 100,357 145,456 118,000
(Loss)/profit attributable to: 
Non-controlling interests
- - - -2,759 -
Net Profit Margin 7.94% 5.66% 9.77% 13.84% 9.88%
Earnings per share (RMB cents) 10.16 11.29 28.15 40.02 33.1


As one can see, Dutech enjoys relatively high GPM and NPMs; and these margins have increased even further in the past 2 years, because of the drop in steel prices. Steel forms the bulk of the material costs for Dutech.

53) Dutech revenue breakdown 06062016

The above breakdown of the revenue over the past 3 yrs show that although the High Security segment is still the main contributor to revenue, the Business Solutions segment has steadily been increasing.

This is consistent with the acquisitions made most recently. Going forward, I think it is fairly obvious that Dutech would continue to focus on the Business Solutions segment, while the High Security segment would still be the main contributor to revenue for a few more years. I cannot find sufficient data on this, but I suspect the margins for the Business Solutions segment is higher.

Condensed Balance Sheet

(RMB'000) FY11 FY12 FY13 FY14 FY15
ASSETS
Non-current:
Intangible assets 20,614 22,078 20,782 15,498 10,037
Total Non-current: 176,769 185,481 193,125 319,599 333,586
Current:
Cash and bank balances 150,649 100,851 168,762 77,813 240,444
Trade receivables 80,354 110,696 148,160 164,728 196,226
Total Current: 326,441 333,686 463,182 517,580 619,259
TOTAL ASSETS: 503,210 519,167 656,307 837,179 952,845
LIABILITIES AND EQUITY
Non-Current:
Long-term borrowing - - - 7,426 8,714
Other payables 19,718 23,283 - 5,285 2,565
Total Non-current: 26,218 37,415 14,136 27,063 42,631
Current:
Borrowings 61,503 10,871 12,469 35,449 46,229
Trade payables 56,171 76,506 99,139 82,969 75,934
Other payables and accruals 17,155 29,773 57,940 71,720 83,056
Total Current: 139,094 120,933 179,444 205,229 216,431
Total Liabilities: 165,312 158,348 193,580 232,292 259,062
Share Capital 168,067 168,067 168,067 168,067 168,067
Non-controlling interests - - - 8,891 -
Total Equity 337,898 360,819 462,727 604,887 693,783


This is a condensed balance sheet. Intangible assets relate mostly to goodwill from Dutech’s acquisitions. Dutech has been conservative in their accounting, and as seen above, they have been amortizing the intangibles yearly.

Cash holdings have also increased substantially. In fact, as of the most recent quarter, FY16Q1, cash holdings is now 289 million RMB.

To illustrate how well capitalized Dutech is, with just the cash holdings of 289 million RMB, Dutech can actually pay off ALL of its current liabilities, including all payables, as well as all its long term borrowings.

In other words, Dutech can completely wipe off almost ALL its liabilities with just the cash on hand. 

Condensed Cashflow

(RMB'000) FY10 FY11 FY12 FY13 FY14 FY15
Cash flow from operating activities:            
Operating profit before working capital changes   51,720 68,273 109,979 116,666 163,773
Cash generated from operations   32,281 52,193 89,925 116,837 131,110
Income tax paid   -5,446 -7,662 -13,950 -14,571 -20,782
Net cash generated from operating activities 78,385 26,835 44,531 75,975 102,790 110,328
Free Cash Flow 42,154 -40,177 8,202 48,231 28,865 77,527
Cash flow from investing activities:            
Purchase of property, plant and equipment -25,131 -30,984 -31,322 -24,190 -55,065 -32,801
Purchase of land use rights -11,100 -36,028 - - -18,860 0
Development costs incurred - - -5,007 -3,554 - -
Net cash used in investing activities -36,999 - 68,192 -24,186 -11,717 -158,896 65,137
Cash flow from financing activities:            
Net cash (used in)/generated from financing activities   5,779 -16,671 1,826 -39,608 2,480
           
Net (decrease)/increase in cash and cash equivalents   -35,578 3,674 66,084 -85,931 177,945
Effects of exchange rate changes in cash and cash equivalents   -5,498 1,802 -595 -2,545 1,595
Cash and cash equivalents at the beginning of financial year   119,290 78,237 83,713 149,202 60,726
Cash and cash equivalents at the end of financial year   78,214 83,713 149,202 60,726 240,266


As one can see, Dutech generally has nice FCF every year. The only capex that’s needed is mainly to purchase machinery and replaceable parts for their manufacturing plants. This is fairly consistent at approximately RMB30-35 mil every year.

FY11 FY12 FY13 FY14 FY15 FY16
Shares outstanding 356.5m 356.5m 356.5m 356.5m 356.5m 356.5m
NAV/Book value (RMB cents) 54.63 101.20 129.78 169.66 194.59 207.95
ROE (Profit / Equity) 10.08% 11.16% 21.69% 24.05% 17.01%
Total Dividends (SG cents) 1.00 0.00 0.00 1.00 1.50 1.00


The growth in Dutech’s book value has been pretty amazing. Almost quadrupled in 5 years. ROE has been in the high teens to 20s in recent years. The track record of dividends though, has been patchy. I am guessing even though Dutech has a large cash hoard and is cashflow +Ve, the management wants to use the cash for further acquisitions and growth. This is something I’m ok with as long as they can show results.

My thoughts

drjohnnyliu1.15bCEO Dr Johnny Liu. NextInsight file photoMy investment thesis back in 2015, revolves around the strong competitive moat that the company has, its stellar and relatively diversified customer base and the large discount to book value then.

The fact that it was considered an S chip did bring up some caution, but ultimately what convinced me was the low remuneration that the CEO paid himself. Dr Johnny Liu’s remuneration was only $370k in 2013, and $200k in 2014. This is rather low compared to other CEOs who have underperformed Dr Johnny Liu.

I also like the fact that the he owns a sizable part of the company through his own investment vehicle.

Updates

As of today (06/06/2016), Dutech’s share price suddenly shot up 15% in a single day. Obviously the share price is now quite different from when I first started this post about a week ago. I am told the sudden rise is due to CIMB’s newly released buy recommendation on Dutech. I have no arguments with that except that as usual, analysts tend to recommend stocks AFTER it has risen substantially. Sure, there’s still profit to be made, but certainly not that of a deep value, contrarian investment.

Also, I’ve mentioned that I do utilise TA for short term analysis. In this particular instance, TA did help me hold on to Dutech:

60) Dutech holdings 07062016

From here onwards, I’d likely utilise TA to determine whether to hold on, add further (highly unlikely), or to exit.

Addenum

As discussed in the comments, here is the chart showing the various margins of the 2 segments:

61) Dutech division margins 07062016


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