Dutech Holdings Investing Thesis

This post was republished on NextInsight:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11049-dutech-amazing-quadrupling-of-book-value-in-5-years

47) Dutech Holdings logo.jpg

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 it’s website. Instead, it’s 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 it’s 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

52) Dutech income statements 06062016.jpg

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

56) Dutech BS 06062016.jpg

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 has 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 it’s current liabilities, including all payables, as well as all it’s long term borrowings.

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

Condensed Cashflow

58) Dutech CF 06062016.jpg

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.

59) Dutech book value.jpg

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

My investment thesis back in 2015, revolves around the strong competitive moat that the company has, it’s 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

Advertisements

15 comments

  1. Hi thumbtack,

    Nice post. I am vested in Dutech like you. Business solution indeed has higher margin than high security as the atm business is a recurring business, hence negotiation is longer and margin is lower. Business solution products can be one off so their margin is higher. Dividend are declared in Q1 due to administration purpose because the company has to file the audited and adopted financial statements with the China authority before money can be remitted to Singapore to pay dividend. Hence the dividend is alway after the agm. All these info were shared by the CEO Dr Johnny Liu during the AGM.

    Like

    1. Hi huangxl83, thanks for your reply. I have seen your writeup about Dutech too. Thanks for sharing about the dividend, it doesnt bother me that its in Q1, but its always nice to know the reason why that is so.
      Do you have a target price whereby you’d consider it fairly or over valued?
      I was hoping this stays under the radar for a bit longer, so that I can accumulate more but I guess the opportunity for that is over.

      Like

      1. I guess the chance to accumulate more at depressed price is over. At current price I don’t think it is overvalued as it was previously heavily undervalued at whatever metrics you used. I probably won’t sell it now as tailwind such as currency and low steel price in their favour. The self serve machine or business solution segment is a bigger market than atm and has better margin. I will hold on to see how it pans out. Hope to see more sharing from you. Enjoy reading it.

        Like

        1. I don’t think it’s over valued now either, even at current prices it’s barely 1.1 times book value and under 6 times PE. Although it is no longer a deep value, contrarian opportunity.
          I bought it at $0.275 and remember queueing to buy more when it was at $0.29 but failed to do so. I refused to increase my offer price even $0.005, and stuck to my intended price.
          That’s such a big pity as I would’ve seen much much larger gains now, barely a year later.
          Thanks for the compliments.

          Like

  2. You guys could dig into into the company’s historical quarterly financial announcement or refer to the CIMB analyst’s report financial section – high security margin is in fact higher than the business solution margin because DTMT has low GPM and dragged the average margin down for the business solution segment.

    Like

  3. Btw from fundamental perspective, even the CIMB analyst’s target price is not aggressive, as highlighted in the report.

    Like

  4. Hi xiangning,

    It was mentioned by the ceo during the recent agm that atm is lower margin because of the recurring nature. Hence there is longer time in negotiation. I think he might refer to the margin going forward. Especially on the Krauth acquisition. He mentioned as they have the capability for both software and hardware instead of hardware itself. This will lead to better margin.

    Like

    1. Hi Xiangning, Huangxl83,
      XN is referring to the CIMB report, I saw that report, there’s a chart that shows the relative margins. Business solutions used to be much much higher margins compared to high securities segment. But this has fallen in the past 2 years such that the high securities segment is now higher.
      I’ll put up the chart in the post.
      As XN rightly put it, the sharp fall of the business solutions segment is due to the acquisitions. However, with integration, the margins should continue to rise. In fact, it has already started rising since FY15.

      Like

    1. CIMB actually has an earlier report on Dutech in Jan 2016, written by these same 2 analysts. In the report, they state that the share price was $0.28 then. The initial diagrams in this report is the same ones used again in this latest report.
      However, in the earlier Jan 2016 report, they concluded with “non-rated” (aka no recommendation), with N/A target price.
      Now, when the share price is way above $0.40, the new report recommends a buy with a TP of $0.61.
      Which is why I commented that these analysts are always late to the game.
      Bearing in mind that in the initial report, they had similar data to this current report. But they had no confidence to issue a buy recommendation at $0.28, but am confident to call for a buy at > $0.4.
      I’m not complaining in this instance as they have helped me greatly. I also don’t dispute their findings in their report, but I have never been a fan of following these analysts.
      IMO, their main usefulness is all these comprehensive reports they compile.
      Even then, I have come across reports in companies that I have done in depth research in, and could identify data published that is just outright wrong.

      Like

      1. Well, according to my understanding from an analyst friend, there are a number of barriers that the analysts must clear before they publish a formal report. One key thing is the market cap and liquidity. They will not be able to publish a report unless the market cap reaches a certain size. Also, sometimes they cannot publish a report before meeting the management. There are also such thing like a investment committee internally that they must pass through to get a yes before publishing. I guess this is the part very different from the public forum.

        Liked by 1 person

    1. I don’t necessarily mean they’re lousy or unethical. But simply because of all the reasons that you mentioned earlier eg. need to wait for a certain market cap, need to clear with management etc, I don’t care what are the reasons.
      The fact is they tend to be rather retrospective.
      However, the markets do actually pay attention and follow analysts recommendations as evidenced in Dutech’s case.
      Their function is to draw attention to companies, and the best thing to do is to run ahead of them. Not with them.
      Just my 2 cents worth

      Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s