Valuetronics Holdings

[Contrarian]

> sounds very overpaid CEO...

Now u know why I ask about his salary. If not listed, I doubt he can draw a salary like this.

Maybe u can ask CEO, why he dont list on HKSE. He is from HK and HK gets better valuation normally

[dzwm87]

If take $1.5mil, his pay is 4% of total revenue for that FY.

Correct me if I am wrong but assuming he does take S$1.5mln, FY12 revenue for Valuetronics was HKD2,300mln which is around S$380mln [simple translation of SGD1 = HKD6]. How is S$1.5mln over S$380mln = 4% of total revenue?

Based on kelvesy's attachment of the 2012 annual report disclosure, even if we use the maximum end of the salary range which amounted to S$4mln, this will be around 1% of FY2012 revenue. If we add in salaries for the management (those not in BoD), this would amount to around 3% of total revenue - not a very low range but at least not exorbitant.

IMO, Valuetronics is interesting because it is the case of buying a fair business for a cheap price. How much are we willing to pay for a fair business which may have its investment moat (if even any) being diminished over time?

Adjusting for the termination loss, Valuetronics is currently at 3.8x historic P/E. Dividend payment is likely to be stable at 5 to 6% yield. Total asset turnover is actually quite good for an OEM producer at close to 2x and as a result, ROA at 10% & ROE at 20% is actually quite good.

The question however is its sustainability. Over a 5-year horizon, their gross profit margin has been gradually falling over the years but somehow, they are trading that off for better asset turnover.

I like the fact that around 60% of their FY2012 revenue is due to OEM role in manufacturing LED light bulbs for Philips but my concern is also the amount of margins which they are getting. Are they being squeezed? And how sticky is Valuetronics to Philips as a manufacturer?

[Contrarian]

> this will be around 1% of FY2012 revenue

> but my concern is also the amount of margins which they are getting

As you pointed out, how about pegging pay to earnings and dividend payouts instead of revenue?

How many small cap company CEO make > S$1M?

Does it make more sense for the company to pay the senior management less fixed costs, reduce salary costs, award the staff shares, incentivise growth in the EPS and then the market reward their stake?

[kelvesy]

I am sorry for the earlier mistake. Amended the earlier post. dzwm87 is absolutely right.

[dzwm87]

How many small cap company CEO make > S$1M?

Does it make more sense for the company to pay the senior management less fixed costs, reduce salary costs, award the staff shares, incentivise growth in the EPS and then the market reward their stake?

Of course, the best case would be for the CEO's remuneration to be 100% derived from its share ownership and 0% on salaries & bonuses. But we know such is rare.

For Valuetronics, their revenue earned is relatively huge - FY2012 was HKD2,400mln which is around S$400mln. So S$1mln is small relative to revenue amount. As a % of sales, his remuneration has been around 0.4% to 0.6% since FY2009. In fact, this has been going down over the past few years since FY2007. So, objectively speaking, he hasn't been 'screwing' the minority shareholders. Net margin decline was probably due to the poor bargaining power of Valuetronics' inherent business nature.

If we look at his shareholding stake and calculate how much dividends he has been receiving for each year (i.e. the extent his incentive is aligned to minority shareholders), we know this amount is only marginally above what he is receiving from his salaries. To put it simpler, the ratio of "cash-out" benefit he stand to gain is close to 50:50 between salary remuneration and dividend from his stake in Valuetronics. Not necessarily the best payout ratio but he still has the incentive to pay out dividends.

That being said, I agree with felixleong that it will be better if he had a significant shareholding stake. Anything >50% is good as this means the CEO will suffer the pain of any capital loss from his/her stake. Large stakes can also prevent them from conducting excessive rights issuance.

One of the concerns also relate to his open market sale dated back in March 2012 when he sold around 14mln shares for an average 24c. His next-in-command, Chow Kok Kit, also sold off around 12mln shares. The rest was history as Valuetronics hits a slump in its licensing business. Some extent of "front running" here but if they were to buy back from open market soon, it could be a good indicator.

Like I said, the main issue relates to Valuetronics' business model. As an OEM, you are no different from a sub-contractor and that's never been a sweet spot in the supply chain. Margins will be squeezed and you have no bargaining power over that. But the question is: how cheap will it need to be before it becomes interesting?

Disclaimer: Not vested

[felixleong]

lets just wait for a sign
if the stock price comes below 20 cents and management buys some shares for themself that would be a very good sign
and they should buy, consider they are so cash rich from the sale of shares at 26c, their pay and dividends
there's very little reason for management not to buy unless they do not see a future in the company they are working for

[NTL]

lets just wait for a sign
if the stock price comes below 20 cents and management buys some shares for themself that would be a very good sign
and they should buy, consider they are so cash rich from the sale of shares at 26c, their pay and dividends
there's very little reason for management not to buy unless they do not see a future in the company they are working for

The last time when the price drops below 19c, did any of the management bought any?

[dzwm87]

Coincidentally, Phillip did a webinar presentation on Valuetronics today. Some key info apart from what's on their annual reports:

+ Philips LED light bulb accounts for 40% of total revenue
+ Other Philips non-LED light bulb products (i.e. electronic toothbrush, shavers, etc) account for another 20% to 22% of total revenue [So, Philips actually attribute to more than 50% of Valuetronics' revenue - so if Philips don't do well, expect the same for Valuetronics though the converse may not be true.]
+ They didn't give the GPM for Philips products but I expect GPM to be lesser than overall GPM. Consumer electronics, about 75% of revenue, is more of a high volume but low margin product mix.
+ They have around 4,000 workers which means wage cost will be a big impact for them. They are aiming to mitigate this by promoting productivity efficiency and adopting automated machines [didn't ask how much of the latter will reduce their work force]
+ Overall, they pitch that they had been the better player given that the entire EMS industry faces the concern of deteriorating margins. That being said, an investor can just avoid the entire industry.

[specuvestor]

How many small cap company CEO make > S$1M?

Does it make more sense for the company to pay the senior management less fixed costs, reduce salary costs, award the staff shares, incentivise growth in the EPS and then the market reward their stake?

Of course, the best case would be for the CEO's remuneration to be 100% derived from its share ownership and 0% on salaries & bonuses. But we know such is rare.

For Valuetronics, their revenue earned is relatively huge - FY2012 was HKD2,400mln which is around S$400mln. So S$1mln is small relative to revenue amount. As a % of sales, his remuneration has been around 0.4% to 0.6% since FY2009. In fact, this has been going down over the past few years since FY2007. So, objectively speaking, he hasn't been 'screwing' the minority shareholders. Net margin decline was probably due to the poor bargaining power of Valuetronics' inherent business nature.

If we look at his shareholding stake and calculate how much dividends he has been receiving for each year (i.e. the extent his incentive is aligned to minority shareholders), we know this amount is only marginally above what he is receiving from his salaries. To put it simpler, the ratio of "cash-out" benefit he stand to gain is close to 50:50 between salary remuneration and dividend from his stake in Valuetronics. Not necessarily the best payout ratio but he still has the incentive to pay out dividends.

That being said, I agree with felixleong that it will be better if he had a significant shareholding stake. Anything >50% is good as this means the CEO will suffer the pain of any capital loss from his/her stake. Large stakes can also prevent them from conducting excessive rights issuance.

One of the concerns also relate to his open market sale dated back in March 2012 when he sold around 14mln shares for an average 24c. His next-in-command, Chow Kok Kit, also sold off around 12mln shares. The rest was history as Valuetronics hits a slump in its licensing business. Some extent of "front running" here but if they were to buy back from open market soon, it could be a good indicator.

Like I said, the main issue relates to Valuetronics' business model. As an OEM, you are no different from a sub-contractor and that's never been a sweet spot in the supply chain. Margins will be squeezed and you have no bargaining power over that. But the question is: how cheap will it need to be before it becomes interesting?

Disclaimer: Not vested

IMHO I think the management incentive should be based on PROFIT, rather than revenue. So S$1m for HK$118m profit before extraordinaries is about 5%, not insignificant, nor excessive.

This is not saying management is bad, but the principle for remuneration should be anchored correctly.

There are many ways management can strip a company even when they are major shareholders, but generally it disincentivises them from dong anything funny if their shareholding is a big part of their NET WORTH. That's why management track record is important because from there we have a rough que on where their "heart" lies.

[CY09]

Are there any comparable firms of Valutronics that are listed in HKSE or SGX?

In addition, its commercial and Electronic division reported a fall of 5% revenue which was accompanied by a decrease of 15% for segment results in these 2 division. So excluding the loss making licensing, valutronics would still had report a lower EPS. Assuming results are consistent for FY 2014, I expect a div of hkd 0.13-0.14. This works out to 2-2.28 SG cents

However, Reading their outlook statement: "In the second half of the year, the Group experienced slowdown in orders from some of its Consumer Electronics customers. However a stabilizing, albeit weak economic outlook in US and Europe may moderate any further downside. With price reduction requested by some of our major customers, prevailing market uncertainties in demand and continuing cost escalations in China, operating conditions will remain challenging." This tells me the possibility of further margin compressions in their consumer electronics division.

<not vested>