Massive FY16Q4 For Dutech Holdings – Digging Deep To Understand The Impact Of Metric Group Acquisition (Part II)

This is a continuation of my previous post:

Dutech Holdings – What’s Next? Realize $117k Profit, Hold Or Add More? (Part I)

Which is in turn a continuation of my initial investing thesis written way back:

Dutech Holdings Investing Thesis

47) Dutech Holdings logo

In this post, I’ll aim to project what goes into Dutech Holdings’ FY16Q4 results, as well as analyze in detail their most recent acquisition.

Now, CIMB’s coverage of Dutech’s financials is pretty extensive, and although in my previous post I cross referenced their DCF with mine to illustrate some slight differences, in this and subsequent posts I won’t repeat what’s already in their report.

Cos there’s really no value in doing that.

Their analyst report is widely available and anyone can go read it. I don’t think SG TTI’s readers want to come here and read some snippets of repeated data cut and paste from somewhere else, or some superficial unsubstantiated thoughts.

Instead, here I’ll discuss some pertinent facts that as far as I can tell, nobody has recognized, brought up, dissected or discussed.

Yet these points, as you’ll see, are telling.

4. Scalability Of Dutech’s Business, Long Term Compounding Of Earnings

I separated this into a post on it’s own as it’s going to be long.

In part I, we’ve already seen how Dutech has a long term track record of profitability, increasing earnings over the years, growth both organically as well as via M&As and they’ve done this on the back of minimal debt.

Any debt that resides in Dutech’s BS currently comes from their acquired subsidiaries and are not bank loans taken up for acquisitions.

Dutech’s key man, Dr Johnny Liu, has thus far, IMO been insightful and his track record has been spotless.

I’ve also worked out the valuation in Part I by doing a peer comparison, as well as a DCF model. (Yes, I’ve received a fair bit of feedback from emails and on Investing Note that the share price has risen a bit since Part I, but I’m really talking in terms of much bigger gains than a few % points)

All these are somewhat backward looking though, and since future gains are substantially affected by what the company does in future, here I’ll attempt to do the impossible and try to peer into Dutech’s future.

Stellar FY16 results

Approximately a month from now, Dutech is scheduled to release FY16Q4 and FY16 results. I’m expecting a set of stellar results. By “stellar”, I mean at least the 2nd best set of FY earnings in the last 7 years (that’s as far back the data I’ve analyzed), and in all likelihood, record earnings by a mile.

This table shows Dutech’s long term record of EPS:

(RMB’000) FY10 FY11 FY12 FY13 FY14 FY15 9M16
Earnings per share (RMB cents) 18.11 10.16 11.29 28.15 40.02 33.1 29.53

As of 9M16, Dutech’s EPS has already exceeded the full year earnings 3 years ago, and is poised to well exceed FY15.

Extraordinary Gain In FY16Q4

In FY16Q4, Dutech completed it’s acquisition of parts (most parts in fact) of the insolvent Metric Group.

412) Dutech's acquisition of Metric.jpg

I’ll spend some time discussing this Metric acquisition and it’s prospects for Dutech as there seems to be quite a bit of confusion (based on the queries I’ve received and discussions on Investing Note after my Part I post)

It’s no surprise why it’s confusing, because the names of the acquired parts are similar, and they changed the name of the holding company just recently.

1stly, it should be obvious at first glance from the announcement, that Dutech got a helluva deal by picking the carcass of an insolvent Metric Group.

Dutech paid up S$4.5mil in cash, which is a tiny chink of the S$69mil in cash and cash equivalents that the company has as of mrq.

In turn, Dutech received S$6.1mil worth of inventory, and intangible assets of S$13.8mil.

Wow. Talk about driving a hard bargain.

But that’s typical of insolvency proceedings. The administrator takes over the company, shields it temporarily from creditors, halts the business and sells off all parts as best as they could. The proceeds are then given to the creditors according to the hierarchy rights, and in all likelihood in this case, the shareholders of Metric walked away empty handed.

From the figures above, it’d also mean that Dutech is likely to recognize a one off, extraordinary gain from this M&A in FY16Q4. This is on top of it’s organic growth (see EPS table above).

Which is why I said I’m expecting stellar results.

Exactly how stellar is this extraordinary gain going to be? Well, I can’t tell exactly, cos that depends on how much of the goodwill Dutech’s accountants decide to write off.

But assuming they recognise the full sum above, Dutech will recognize a total gain of S$15.5mil, which works out to be.. <gasp> about 21 RMB cents more!

I had to rework my figures a few times to make sure I got it right.

If that’s true, that’s going to blow out the EPS for FY16 to somewhere close to 60RMB cents, which is record EPS by a mile.

Even if Dutech decides to write off some of the goodwill, I can’t see how there won’t be an additional 20 RMB cents or so added to earnings come FY16Q4 from this acquisition.

Again, bear in mind this extraordinary gain, is on top of the current large jump in earnings in FY16.

Fact: In every quarter of FY16 (Q1, Q2 & Q3) thus far, Dutech’s earnings has exceeded the same period in the preceding year by approximately 20%.

Previous M&As

One of the ways to understand this metric acquisition, is to understand Dutech’s past track record of acquisitions. And here, we have plenty of material to work with, seeing that Dutech is not exactly a virgin in the M&A field.

In FY15Q4, Dutech acquired Krauth by paying 200K euros for it’s shares, and another 250K for know how and patents etc.

“The net tangible asset of Krauth was €220,000 as at 31 August, 2015.”

413) Dutech's acquisition of Krauth.jpg

OK, so Dutech paid 200K euros for something that’s assessed to be worth 220K euros. So… they should recognize a gain on acquisition of 20K euros right? Nothing to shout about.

20K euros, based on an exchange rate of 1 euro = 7.3 RMB, should be = 146,000 RMB

But check out FY16Q1 results:

414) Dutech FY16Q1 gain on bargain purchase.jpg

Oh boy, I was surprised to see a gain of 2,547,000 RMB as opposed to just 146,000 RMB.

And what’s the given explanation?

415) Source of Dutech's extraordinary gain in FY16Q1.jpg

OK so basically the company is saying, after paying 200K euros for what is assessed to be 220K worth of assets as of August 2015, this 220K euros worth of assets is actually worth (200K euros + 2,547,000 RMB = 550K euros) in March 2016.

The next question that pops into my mind is, what accounts for this additional difference? Is it cold hard assets/inventory? Or is it in the form of goodwill?

Since the statements are audited, if the difference is in the form of inventory, I’d feel much more comforted. Goodwill is, well, arbitrary. It’s as good as what you want it to be.

This is an important point to investigate, because if management has a long term track record of arbitrarily raising goodwill in M&As and recognizing that as an extraordinary item to earnings… well I’m liquidating my stake and I’m outta here before anyone else. Good luck to the bag holders still hanging around.

So how did I investigate? Bear with me as I go into the micro-specifics just this once. (Won’t do it here for all the other acquisitions. Math is not meant to be done on a laptop)

416) Dutech's BS FY16Q1.jpg

Here we can see as of FY15Q4, Dutech carried 10,037,000 RMB of intangible assets. In the Krauth acquisition above, they also paid 250,000 euros (1,825,000 RMB) for knowhow, and that’s added to this intangible assets.

417) Dutech's depreciation and amortisation in FY16Q1.jpg

In FY16Q1 though, they amortised 1,365,000 RMB worth of intangibles.

This means that as of FY16Q1, the BS should have (10,037,000 + 1,825,000 – 1,365,000) RMB worth of intangibles. = 10,497,000 RMB

As we can see in the BS above, as of FY16Q1, the intangibles amount carried in the BS is 10,859,000 RMB, which is not too far from the 10,497,000 RMB. Part of the difference can be explained by rounding errors and partly by differences in the forex rates used for the calculation.

What I’m trying to illustrate here, is that most of the (extra) extraordinary gain, if not all, came from Krauth’s inventory.

Dutech didn’t explain in greater detail how this extra extraordinary gain came about, but as long as it’s not some imaginary goodwill/intangibles figure, I’m happy with it.

On a related note, in the earlier Tom Gayner video I referenced:

I remember someone in the audience asked how can a retail investor with no real access to management, judge whether the management is capable and has integrity.

Well, I think my above teardown on the accounting specifics, will be one of the nuances that hint at the integrity of the management. Sure, a single example may not be adequate. But do this enough times and along various aspects, and you’d get a pretty good picture over time.

By digging deep and looking at the details, one can glean precious information about how the management conducts itself. Another simple example: even the consistent 1,365,000 RMB in amortization every quarter, tells me a lot about how conservative the management is and the management’s attitude towards intangibles.

Dutech’s Value Proposition For Metric Group’s Operations

To assess the merits of the acquisition, and to see how Dutech can turn around Metric, of course we’ll need to have some in depth knowledge of Metric Group.

This is Metric’s FY results, up to FY15:


Lost money in 4 of the past 5 years, with -ve CFO in 3 of the past 5 years. Is it any wonder that they’re insolvent?

But wait! There is a silver lining. EBITDA is actually positive in 2015. Part of the reason for the losses comes from non cash items like D&A, and of course cash items such as all the administrative and finance costs, taxes etc.

What’s cause for some optimism, is the CFO. Regular readers of SG TTI would know I personally love CFs. 6.7mil Euros from CFO is a massive improvement.

Metric Group’s main business units are divided into a “Public Transport” unit, a “Retail & Logistics” unit (Both located in Hanover) as well as a car park ticketing unit, under a subsidiary Metric UK (Based in UK).

419) Metric ticketing.jpg

The Public Transport and Retail & Logistics units do not have their own manufacturing plant for their products. It’s obvious that Dutech is going to use what has worked marvelously in their previous acquisitions: Apply Dutech’s lean, efficient and low cost production chains in Shanghai to support these 2 metric units.

Metric UK has it’s own manufacturing plant, but I like this unit a lot. Mainly because it provides recurring income for Dutech. Every car park ticketing machine sold has attached maintenance contracts, and this provides a constant recurring income for Dutech.

Metric UK is the ONLY car park ticketing machine manufacturer in UK.

Their latest ticketing machines have features such as video displays for advertising, and this potentially may generate a new income stream for their clients.

My understanding is that Metric UK intends to use this as a selling point for their clients to replace their older ticketing machines with these new ones, which would in turn, generate maintenance contracts for Metric UK.

Also, newer ticketing machines have features like wireless payment:

420) Cardiff_Main_image1.jpg

In fact, as of Nov 2016, the city of Cardiff in Wales has decided to adopt Metric UK’s ticketing machine and is in the midst of rolling it out city wide.

All in all, I don’t think Dutech is going to reinvent the wheel here. They’ve successfully executed this before, and this is going to be a replay of what they’ve done previously. The previous turnaround of DTMT took much faster than I expected, and I don’t think it’ll be different this time around.

FY17 would likely see an increase in administrative expenses due to integration costs, similar to in FY15 when Dutech was integrating DTMT.

This acquisition though, also does mean that Dutech’s exposure to Forex is now increased further as Metric UK’s operating currency is in pounds.

Some of you (on Investing Note) seem to have trouble getting the relevant financials for Metric in English, so here it is.

(Again, don’t ask me where I got these from. I honestly don’t remember, it’s been at least a couple of months)




(Grrr all that is taking up a lot of my allocated free data space so quickly save it. I might delete them when this post gets old and nobody reads it)

I really intended for this Dutech update to be a 2 part post… but that’s too ambitious I guess. This is way too long so there will be a 3rd part afterall.

All mega blockbuster movies these days come in trilogies anyway right?

P.S. The math above and basically this entire post is written by a very tired TTI at 3am in the morning. So if you spot any errors, pls feel free to embarrass me.

Dutech Holdings – What’s Next? Realize $117k Profit, Hold Or Add More? (Part I)

Firstly, let me say Happy New Year and a BIG thank you to those who have recently subscribed to SG TTI. There was a sudden surge in subscriptions since my previous post (ThumbTack Investor’s Random Musings – Selling Property, Hand Foot Mouth Disease, Gold, New Blog Links, Advice For Beginners. Yes, It’s Random.)

Thanks for supporting good deep value research and content. I promise to continue to share my work here as timely as I can.

399) Many Thanks!.jpg

I’ve previously shared my investing thesis on Dutech Holdings:

Dutech Holdings Investing Thesis

In fact, I was actually a bit surprised that I’ve only written 1 post on Dutech, seeing that Dutech Holdings is a company that I’ve done a ton of work on, and it is currently and will likely be one of my core positions longer term, making up 26% of my portfolio.

47) Dutech Holdings logo

Just to recap: I took up a position of 570,000 shares in Dutech Holdings back in April 2015, at an average price of $0.275.

Since then, the share price has rallied strongly, particularly in 2016, giving me a paper gain of approximately 74.55% or a profit of $117,000 in 18months.

400) Dutech Holdings share price.jpg

The share price has since retracted somewhat from it’s highs.

2 months ago, when the share price was around $0.48, I found myself facing the inevitable question most people think of when one of their holdings has risen this much this fast.

What’s next?

Should I divest and pocket the $117,000? Hold and wait for further gains? Double down and add to my stake?

What would you do if you’re faced with such a scenario? A happy one, no doubt.

Anecdotally, I think most people would choose to divest and pocket the money. Some may hold out and wait further if they’re optimistic. Few will double down and add further. So on this note, I consider my decision to be very contrarian.

Having studied the data in detail, I’ve made the decision to double down, adding another 30,000 shares at $0.465, and yet another 30,000 shares at $0.445.

(See transactions record: transac)

This means that I currently hold 630,000 shares at an average of $0.2908.

I don’t rule out deploying more capital and adding yet more if the price vs my perceived intrinsic value gap widens further. In the short – mid term, this may very well be the case as the TA data for Dutech is bearish, the price has been trending down and is currently below both 50 and 150 DMAs. There’s also no reliable support level currently. I’m mindful of all that as I keep some powder dry.


I don’t take a decision to “double down” lightly though, so here I’ll share my thoughts and my DD on why I’ve opted to add.

As always, since this is an update on an investing thesis, I won’t bore you with the basic details, but will dive right into the fun parts. So, what makes me optimistic about Dutech’s long term prospects?

In the same vein as my previous post, (ThumbTack Investor’s Random Musings – Selling Property, Hand Foot Mouth Disease, Gold, New Blog Links, Advice For Beginners. Yes, It’s Random.), I’ll use the 4 points suggested by Tom Gayner to illustrate this. (

  1. Long term track record of profitability, stellar ROIC with minimal debt utilisation


FY14’s large jump in EPS is mainly due to a one off gain of RMB55.9mil from the acquisition of loss making DTMT.

Basically, Dutech’s modulus operandi is to deploy it’s consistent +ve FCF to make acquisitions of distressed but related companies, bring them under the Dutech family, integrate operations and work on the turnarounds.

By buying distressed companies, they get to buy them on the cheap, and subsequently, recognize the difference between the price paid and the book value of the company as one off extraordinary gains.

Of course, it’d be prudent to strip away these one off gains to assess the true operating profitability of the company. Even without the one off gain though, FY14 recorded a very respectable EPS of 24.34RMB cents.

As of FY16Q3 (latest quarter), Dutech’s results are still pretty impressive, showing y-o-y gains:

403) Dutech FY16Q3 results.jpg

NP grew almost 10% at the 9M mark, and this growth in earnings is the best type of growth: by growing the topline while limiting the expenses incurred to achieve this growth.

This is in contrast to companies that show profit growth, but if one looks in greater detail, the growth is attained by cutting expenses.

Administrative and R&D expenses rose, in line with the acquisitions that Dutech undertook. I’m actually glad to see a moderate rise in R&D expenses. My current thoughts, and I’ll substantiate this probably in Part II, are that Dutech is no longer merely a typical manufacturer, but has evolved into an integrated business solutions provider. This means controlling the entire supply chain from the manufacturing process, installation of intelligent terminals and providing maintenance, troubleshooting, consultancy and other related services.

Recently, there have been huge changes aka challenges within the global ATM market, and I’m hoping Dutech’s R&D will provide it with the competitive edge to deal with these challenges. More on this in Part II.

Selling and distribution expenses actually dropped, and that’s a surprise to me. It does tell me that Dutech is integrating/has already integrated the manufacturing, the distribution channels and probably the sales force for the acquired companies: DTMT and Krauth.

From a CF perspective, Dutech’s business is also extremely free CF generative, a parameter that I place a lot of emphasis on regardless of which company I am analysing.

404) Dutech CF record.jpg

My calculation of FCF is particularly conservative, as I subtract purchases of land use rights and even development costs out of CF from operations (on top of the usual PPE), classifying them as part of the costs needed to maintain operations to generate the required CF.

Still, we can see that over a multi year record, the cash horde that Dutech holds has been steadily building up, despite having deployed cash to acquire 3 companies in the past 3 years!

As of mrq (9M16), the cash hoarde has continued to build up to RMB 313.5mil, from RMB240.3mil as of FY15.

This set of impressive results over the past 6 years, was also achieved with minimal debt:

406) Dutech FY16Q3 BS borrowings.jpg

As we can see, the total borrowings is kept very low: Cash and cash equivalents could’ve easily covered the total amount of borrowings in any 1 year.

The available for sale financial assets are mainly liquid bonds and equivalents, and are thus considered as cash equivalents.

As of 9M16, the total debt rose to RMB108.7mil, a >100% rise from FY15. The rise though, is attributed to the acquisition of Krauth. I’m expecting total debt to rise further in the near term, as the acquisition of Metric is completed in 4Q16.

Still, all this is very palatable for Dutech:

Dutech did not borrow and take on new debt to make acquisitions; the rise in debt is due to the debt on the books of the acquired companies.

This is an important point to note, because it’s obviously very different from a company having to borrow money to make acquisitions.

Over time, Dutech’s efficient machine will grind away at the debt in the acquired companies.

Alright, just to recap: so we know that the company has been doing well on the earnings front, and the EPS trend is generally upwards. We also know that the business is extremely FCF generative. And finally we know that all this is achieved with minimal debt over the past years. How about the ROE figures? Cos that’d tell us how efficiently the management utilizes the equity of the company to generate a return for shareholders.

Long Term ROEs:

FY11 10.08%
FY12 11.16%
FY13 21.69%
FY14 24.05%
FY15 17.01%

The extraordinarily high ROE figure in FY14 is due to 1 off gains from acquisition. Still, we can infer that the core ROE figure would be in the high teens to early 20s+ % range. Pretty impressive.

2. Capability and Integrity of Management

Even now, Dutech gets wrongly classified (in my opinion) as an “S-chip”. My issue with that is that S-chips (justifiably so), have a negative connotation to them.

What exactly constitutes an S-chip anyway?

Dutech’s listed on SGX. Sure, they have manufacturing plants in China and are headquartered in Shanghai, but only 23% of the sales are in China. Of this 23%, the bulk of it is exported eventually.

Dutech also has operations in US, Europe (particularly Germany) and now, with the acquisition of Metric, UK as well.

Dutech’s clients are all major, international players like Diebold, Wincor (they just merged btw), Hitachi, Liberty Safe etc. This stands in stark contrast to other chinese players which do not have any international presence; they can’t even if they tried to, because they don’t have the certification (UL and UEN) that Dutech has.

CEO Johnny Liu is Chinese, but educated in the States. I highly doubt he’d usurp money and run away.

Dr Johnny Liu’s total pay remuneration in 2013, 2014 and 2015 is $370k, $200k and $410k respectively. All very reasonable considering the performance of Dutech. I don’t think these figures are reflective of someone who’s overriding concern is his own personal interests and not the company’s.

The company’s top 5 shareholders are all dominated by management, with the exception of Mr Robert Stone. In fact, I kinda wished they wouldn’t own so much of the company. Collectively, the top 5 own 75.66% (as of AR 15) of the company. That doesn’t leave much shares floating around for the public. (TTI alone owns 0.18% of the company……)

CEO’s brother is part of the management team as well.

Dr Johnny Liu also comes with an illustrious career. Check out this chinese piece on him talking about his entrepreneurship:

The point I’m driving at is that Dutech’s CEO has as much skin in the game as anyone else. Not just because the bulk of his fortune is aligned with that of Dutech, but what’s probably more important is his reputation.

Still think Dutech is a “S-chip”?

Dutech doesn’t even look like a SG company to me. They’re global. Period.

3. Price vs the intrinsic value

No matter how great the company is, there’s always a price range, past which the investment no longer makes sense.

So let me try to relate the price to my perceived value here. For my calculations, I’ll assume the share price is $0.445 cos that’s the current price as of writing this. (And that’s the price my most recent accumulation is at)

Based on FY15’s core earnings (excluding one off, extraordinary gains) of 31.3 RMB cents, the PER is currently 6.8 times.

That is misleading though, as FY16’s earnings is likely to exceed FY15 very substantially. Earnings at the 9M mark is already 10% higher than the corresponding period in FY15 and as I’ll show in Part II of this discussion, Dutech’s 4Q16 results are likely going to be a blowout quarter, such that FY16 performance would be >>> that of FY15.

As of mrq, Dutech’s book value is RMB 223.19 cents, which works out to a P/B ratio of 0.96.

All these valuation metrics by themselves, are not very useful. We need to compare to industry peers to have an idea of what’s the norm.

In this space, Dutech doesn’t really have any peers to compare against. I don’t consider the myriad number of local safe manufacturers in China as Dutech’s peer.

The closest is Stockholm listed Gunnebo Group, which manufactures safes as well as cash management systems, although they have other dissimilar segments as well, such as entrance security.

408) Gunnebo logo.png

For FY15, Gunnebo’s EPS = 2.18 SEK, with a BV of 22.65 SEK. ROE figures work out to be 9.9%.

As of 9M2016, Gunnebo’s EPS = 1.35 SEK, with a BV of 22.42 SEK. ROE = 11.1%

Based on the share price of 39.60 SEK, this works out a PER of 18.2, and a P/B of 1.77 times.

In comparison, Dutech’s PER of 6.8 tiimes and P/B of 0.96 looks comparatively cheap.

Here are the related FS for Gunnebo:



Despite the massive run up in Dutech’s share price in 2016, it is still some way away from matching the valuation of peers.

On top of that, Dutech is in the growth phase. CFs are growing y-o-y, whereas Gunnebo is a mature company, and growth has been stymied in 2016. Dutech is also generating much higher rates of return on it’s equity compared to Gunnebo.

My personal favorite valuation technique though, is the discounted cash flow modelling. The concept behind DCF makes perfect sense to me. As with all modelling techniques though, the input parameters are the key.

And since we’ll have to rely on a bunch of assumptions, we can’t expect the CFs to be iron clad. Still, I find it to be a great tool to get some idea of valuation. Sides, one can monitor the CFs and update the DCF model quarterly to see how it’s progressing and tweak it accordingly.

CIMB has worked out a DCF model in one of their reports. I really wished they’d give more details though, it took me a long time to figure out the numbers. Even now, I still don’t get why they have such high CF figures past FY18:

409) CIMB DCF for dutech.jpg

I get that they’re probably expecting a significant dip in FY17 CFs due to consolidation expenses from the recent acquisition of Metric. I thought it’s a bit too aggressive a drop.

But following FY17, they’re expecting a massive jump in CFs from FY18 onwards, particularly from FY18 to FY19, with a massive 17% jump. Don’t quite get how they came up with this.

410) CIMB DCF for dutech II.jpg

Interestingly, I used my own DCF modelling, with somewhat different figures and assumptions, and it didn’t come out to be too far from CIMB’s TP either.


411) TTI's DCF for dutech.jpg

I started out being more aggressive than CIMB, by expecting that CFs are not that greatly impacted in FY17.

I also assumed that the WACC is 12%, and that the CF growth rate in the 1st 5 years is 8%. Long term growth rate is 2%. (Much more conservative than CIMB’s massive jump)

Using the Gordon Growth Model, the Terminal Value I got is RMB 1,179,544,000

Adding all that up gives us an Enterprise Value of RMB 1,022,616,000

Net cash and cash equivalents as of FY16Q3 = RMB 222,426,000

Fair Value = RMB 1,245,042,000

Equity value / share = 0.72 SGD

Illiquidity discount = 15% (CIMB used 20%. 20%-30% is typically used for private, illiquid companies, but since Dutech is listed and not that illiquid, I opted for 15%)

TTI’s DCF Target Price = 0.612 SGD

Which is not too far from CIMB’s 0.65 SGD TP.

I’ll leave point 4, which analyzes Dutech’s scalability and prospects going forward, to Part II as it is really long.

Please share your thoughts and comments with me in the comments section, or via email, especially if you’re familiar with Dutech’s operations.