Cheung Woh Technologies

[cif5000]

This particular filing has attracted attention in the US because in 2009 Solyndra, a solar company, a) had been a recipient of a > US$ 500 Million Federal Government Loan Guarantee to build a factory ............ a factory which I understand was completed only months ago, b) laid off all its 1,100 workers at end August and c) was sometimes held up as the kind of job-creating enterprise the US needs right now. Is it not a tad puzzling that it took Cheung Woh nine (9) days to report Solyndra's Chapter 11 filing to the SGX? To be fair, may be they needed time to quantify the impact.

Solar companies are facing tough times. Pressure from low cost Chinese companies killed them. Ironically, the Chinese themselves also get funded by the government.
http://leebankruptcy.com/bankruptcy_blog...im-future/

I wonder if she has the fortitude and grit to internally push for the controls and measures required to bring Cheung Woh's receivable levels to heel?

This problem is directly proportional to the size of WD. And since WD itself is running on poor economics (and outlook), why should they pay their suppliers quickly?

- Cheung Woh's recent Chinese transaction effectively put nearly all its eggs in the HDD business - I suspect that as a result of today's news there may be a heightened level of questioning amongst shareholders regarding the strategic wisdom of this move. However, Chairman & MD Law has demonstrated his skills and touch in the past - I'm confident he made this call after a great deal of carefull thought and calculation.

The most recent annual report was published 3 months before the divestment decision. In it, I quote,

As for the automotive component business division, our Group plans to accelerate its market penetration by launching new products and winning new customers. We are taking steps to supply our motorised seat track recliners and seat adjusters to mid and high-end cars, as well as our complete set of driver’s seat assembly to heavy trucks and long-distance coaches. Our customer base would be expanded to other foreign automakers in the PRC.

According to Daiwa research, passenger vehicle demand in China is expected to grow 12% yoy in 2011, driven by buoyant automotive demand from 2nd and 3rd tier cities. This positive outlook bodes well for our automotive component business expansion drive. To cater for the anticipated higher demand of our automotive parts, we intend to spend a total of S$9 million in FY2012 to procure new plant and machinery.

The official rationale was "to enhance the Group’s financial position by maintaining an optimal corporate and capital structure." And then in the clarification, it added, "The automotive segment while still attractive, is facing increasing challenges due to the long working capital cycle. This will hamper our ability to grow the business while maintaining a prudent capital structure."

Is the automobile cash cycle longer than the HDD? Why is there a need to sell?

It seems to me that CW has to increase its investment in HDD segment just to keep up with (or lose) WD. Reallocating resources from automobile to HDD is less damaging than to raise capital or debt. Just my speculation.

[dydx]

Solyndra has 2 state-of-the-art solar panel fabrication facilities in Fremont, California, including a new Fab 2 completed in 2010 which was partially funded by a USD535.0m loan from the U.S. Treasury’s Federal Financing Bank, backed by a U.S. Department of Energy loan guarantee. To appreciate the advanced manufacturing technologies involved in Solyndra's facilities and their investment value, we can just review video #2 (entitled "Solyndra Fab 2") available from the company's website.....
http://www.solyndra.com/technology-products/videos/

My own guess is that Solyndra will undergo a capital restructuring under Chapter 11, with the likelihood of new investors coming in to provide additional funding to help tide over the present tough market conditions. So it is entirely possible that with some luck CW may emerge from this episode with only minimal losses.

[d.o.g.]

My own guess is that Solyndra will undergo a capital restructuring under Chapter 11, with the likelihood of new investors coming in to provide additional funding to help tide over the present tough market conditions. So it is entirely possible that with some luck CW may emerge from this episode with only minimal losses.

If you follow the links below it seems that Solyndra is fundamentally uncompetitive for as long as silicon is cheap. Solyndra's technology is competitive when silicon is expensive, which it was a few years ago. But silicon has come down a lot in price, with the result that Solyndra's per-watt costs are currently about 2x those of Chinese competitors.

As solar panels are priced on a per-watt basis, a 100% premium is fatal. A good brand name could get you a 10-20% premium, but 100% is a major challenge. You don't carry a solar panel around for bragging rights, unlike stuff from LV, Coach or Prada.

http://finance.fortune.cnn.com/2011/08/3...-solyndra/
http://www.nytimes.com/gwire/2011/09/06/...45598.html
http://www.bloomberg.com/news/2011-09-05...-says.html

As for Cheung Woh itself, it may indeed be able to recover some of the money invested to serve Solyndra. But I wouldn't bet on Solyndra coming back to life.

[D123]

I would add that Cheung Woh's recent woes are hardly surprising. This comes from observation of the economics of their business and other businesses similar to theirs.

First, they produce goods that are difficult to differentiate from their direct competitors. Sure, there might be small differences in quality and cost, but it's safe to say such differences are insufficient to differentiate them from their competitors. Whether or not they get the business orders would depend on their quality, after-sales service, timing of delivery, and perhaps most importantly, cost. Every part of its operations is likely squeezed by its customers in order for it to retain the business. I describe such goods as having commodity-like characteristics.

Second, they produce goods that are used in the manufacturing of an end-product that faces high pressures in innovation. There is a higher possibility of HDDs being made obsolete one day than say, Gillette shavers, Coca-cola, deposit accounts, insurance policies, cotton fibre, chicken meat or apples. In terms of the tech world, you can argue that HDD is competing against other forms of technology on the basis of lower cost (due to overhanging inventory and the existing PPE used to produce them). If Seagate and Western Digital are competing on cost, you can be certain that their suppliers will not be having an easy time extracting profit margins either.

Lastly, it's such a cyclical industry. Because businesses cannot forecast future demand accurately, we will always see boom and busts for business supporting goods like computers, HDDs, printers etc. For such goods, many factors lead them to be susceptible to boom and busts. First, there is a long lead time to produce them. Second, there is tremendous economies of scale to produce them on the cheap. So if it can be produced cheaply at a large scale rather than a small scale, people will tend to over-produce it when times are good and orders are coming in thick and fast. So if I can produce 2X the number of goods with 1.1X the amount of costs, I would do it.

The above reasons add up to incent producers of technical, commoditized goods to produce too much when times are good, thus requiring them to cut down significantly when times are bad. Compare a Cheung Woh-like small HDD parts manufacturer vs Apple. This can tell you the difference between a tech commodity and a differentiated tech good. Demand for one is subject to business cycle boom and busts, and the other creates its own demand. Then think about a Cheung Woh-like small HDD parts manufacturer and an insurance underwriting company. This can tell you the difference between a tech commodity and a financial commodity. Both are subject to low margins but one is subject to the boom and busts of the business cycle while the other, not so much.

There are many other factors that I have not touched on, which impact the economics of the business too, such as obsolescence of inventory and globalization of competition. These also have impacts on income statements, balance sheets and consequently, free cash flow, but I reckon the above points should be sufficient to make the conservative investor skeptical of the attractiveness of the industry in general.

Moving on, here are what I think would be the quantitative impacts of such economics on the company's business performance:

1. Gross revenues will be cyclical. As orders fluctuate with business cycles, the company's top line will be impacted. (see: Spindex, Cheung Woh's HDD segment, Innovalues, Micro-Mech etc.)

2. Margins will be cyclical. As utilization rates of production capacity rise and fall, as well as the scale of production, margins will be impacted. Couple this with revenues that fall just when margins are impacted, and you have a big impact on net profits. (see: Spindex, Cheung Woh's HDD segment, Innovalues, Micro-Mech etc.)

3. Capital expenditure will be ever increasing. As the industry strives to keep costs low, they will be more and more willing to spend on bigger, better and faster machines to produce the small parts that they sell. This would be useful if their order books are always increasing, as you can be sure of maximizing the use of your machines. If order books rise, well and good; if they tank, then you would have just made a very expensive capital allocation exercise (see: Innovalues Ltd)

In either case, the fundamentals of this capital expenditure exercise likely sucks because you are likely to be paying for new technology to produce old technology. That's because sometimes, you cannot buy the old technology that you once used anymore, and are forced to pay up to buy the new technology. Ever-increasing capital expenditure means that depreciation will likely to be lower than capital expenditure. And this means that reported net profits over-state free cash flow.

4. Inventory obsolescence and working capital pressure from customers mean that the "net changes in working capital" section in your free cash flow calculations will be a significant part. This is not purely academic. It means even more that net profits over-state free cash flow (and dividends are paid out of free cash flow). Some firms maintain a high level of trade receivables to trade payables, which means that they can pass on lengthening receivables to their suppliers, which is well and good. For others, who are not able to pressure their suppliers, they have to maintain a higher level of cash in their balance sheet for working capital, to facilitate payment of bills, to capture new business opportunities etc. So the high level of cash you see in many of these firms does not mean that it can be readily paid out as dividends. They should be counted as part of working capital. (see: balance sheets and dividend history of Spindex, Micro-Mechanics etc.)

In conclusion, I guess my point is this: it is erroneous to take the last reported earnings of such companies, slap a P/E on them, and say they are cheap. For one, you cannot expect earnings on cycle peaks to be representative of annual earnings going forward. And two, reported earnings likely over-state the true free cash flow, or owner's earnings if you like, of the company. In light of these, here are two relevant questions:

A. What then is the best way, to value such companies?
B. If they are difficult to value, are they still viable options for investment or speculation?

I'm sure many in this forum are aware of the points mentioned above, but nevertheless, I think it is worthwhile writing them down to remind ourselves, and perhaps refresh the knowledge base in our grey matter.

[yeokiwi]

Compare a HDD manufacturer vs Apple.

Eh... the same statement can be "HDD manufacturer vs Nokia" 6-7 years ago.
But, 6-7 years later, Nokia is spiralling down to nowhere.
Seagate is still alright.

The Apple position can change if there is another more defining product than Apple. I think no one would have thought that Nokia will come to this state 6-7 years ago.
But, to bring Seagate down, it requires another technology to bring it down(definitely not flash..)

[D123]

Compare a HDD manufacturer vs Apple.

Okay, my bad, I think it was not worded properly. I had Cheung Woh-like small HDD parts manufacturers in mind when I was writing the post (some are mentioned in the post).
Should I edit the post?

(P.S. And yes, I don't think Apple is necessarily an excellent business either, just because of the success it has had with the i-things. It has excellent products for now, but that doesn't mean that as a business it can succeed for a long time, or avoid Nokia's fate. I was just trying to reflect on the differences in industry economics between the Cheung Woh-like small HDD parts manufacturers and other businesses.)

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Update: Okay, I've changed the wording. Thanks for pointing out the mistake.

[pianist]

my cost-in price for cheung woh shares (that I have never sold before since their purchases) is at 0.136...
have not average up and also have not triggered the need for me to average down...i have no idea what to do with it..

[redcorolla95]

A. What then is the best way, to value such companies?
B. If they are difficult to value, are they still viable options for investment or speculation?

I'm sure many in this forum are aware of the points mentioned above, but nevertheless, I think it is worthwhile writing them down to remind ourselves, and perhaps refresh the knowledge base in our grey matter.

Assuming that the balance sheet assets are decent, then, from Feb 2001 to Feb 2011, they made about 15% per year. Considering the size of the company, a guess of the cost of equity is about 15%. So the company should be worth about book value, i.e. $0.30.

[sgmystique]

Cheung Woh's promised share buyback's begin...

Singapore Exchange

Date of Purchases: 09-09-2011
Total number of shares purchased: 14,000
Number of shares held as treasury shares: 14,000
Price paid per share: S$ 0.175
Total consideration (including stamp duties, clearing charges, etc) paid or payable for the shares: S$ 2,494.05

[RBM]

Long overdue. And 400 lots were traded at S$ 0.18 today - I suspect CW was buying back again, which is positive for existing shareholders. In a heavily falling market over the last two trading sessions, CW is actually up half a cent despite last Thursday's disclosure on a failing US customer. Vested.