Month: January 2017

Dutech Holdings – What Lies Ahead? Part III

This is a continuation of the earlier posts:

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

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

In Part III, I will be sharing mainly on what are the happenings in the industry that would affect Dutech Holdings’ immediate – mid term prospects, as well as some of the potential risks/headwinds that the company may face. (Yes, every investment must be prospective. Only focusing on the good news and ignoring the potentially bad news, reminds me of the old radio advertisement “Hear only the good stuff”)

As with all trilogies, the best part is always the last installment…

Most of this stuff is new, as in I don’t think anybody has noticed or discussed it in detail, particularly in relation to Dutech’s prospects.

Yet, if anything at all, this post is going to illustrate the major catalysts for Dutech going forward. It is, IMHO, revolutionary and illuminating. Do tell me if you agree or disagree after reading.47) Dutech Holdings logo

TA

The share price has actually risen somewhat since my Part I post on Dutech. I have had at least a couple of readers who have emailed me to congratulate me, saying that my analysis has moved the share price.

Well, as flattered as I am, I can tell you guys that’s simply not true. I don’t think we’re giving the markets enough credit. This is simply a coincidence, and in fact, most of my other posts seem to have the immediate opposite effect, if I’m being honest.

In any case, I’m talking about longer term, and much larger gains than a few % points. (Of course if I can get the much larger gains without the “longer term” part, I won’t complain…)

Anyway, from TA perspective, (and I’ll again put a disclaimer here that I use very very simplistic TA rules, just 50 and 150 DMAs without any of the complex jargon), the rise is now considered a “bullish trend”, having risen substantially above both DMAs, and on relatively solid volume, with the averages trending upwards too.

I don’t think of using TA the way normal TA practitioners do. Rather, I am just trying to preempt the guys using TA, it’s essentially a barometer of sentiment (even then, not always a very accurate one) and I usually spend a grand total of at most 5mins to take a look.

422-dutech-share-price


Merger Of Diebold And Wincor

In late Nov, Diebold and Wincor Nixdorf, the 2nd and 3rd largest safe manufacturers globally, combined in a $1.8billion deal to form the largest player in the industry.

Prior to the merger, Dutech supplies >50% of the safe orders from Diebold and Wincor. Hence, this merger is of great significance to Dutech.

The merger has many synergies, the most obvious of which is geographical. Diebold dominates the US markets, while Wincor dominates the European markets. Post-merger, Diebold Nixdorf will have a 35% share of the global ATM market, while what used to be the largest player, NCR Corporation, will now have around 25% of the market.

421-diebold-nixdorf-logo

Since Diebold and Wincor are 2 major clients of Dutech, I thought it’d be good to understand more about their merger, the happenings of the company and what the future plans are post-merger.


Global Move Away From Hardware Towards Software And Services

Following the merger, Diebold Nixdorf has indicated that the company’s future direction would be towards providing the software and services, with less emphasis on the actual hardware.

This is reflected in their financials as well:

423) Diebold Nixdorf revenue.jpgHere are Diebold Nixdorf’s latest financials. As we can see, under the financial self-service division, revenue from services has risen 41.7%, far exceeding the growth in products. The company has also recently announced new service contracts with several major banks in US to provide servicing and maintenance for their ATMs, including many ATMs that were not manufactured or installed by Diebold Nixdorf.

The retail division is something new, following the merger. Diebold Nixdorf now works with retail businesses to provide information machines in malls that enhance the retail experience.

This push into software related businesses is, on a net basis, good for Dutech as this means that Diebold Nixdorf will increasingly rely on Dutech to work on the hardware part.

Dutech’s low cost and efficient manufacturing facilities in China will thus likely be kept even more busy as Diebold Nixdorf subcontracts out more of the hardware manufacturing parts to them.

With Dutech being the main supplier for both Diebold and Wincor before their merger, it is highly likely that as the new company sub-cons out the hardware manufacturing part, Dutech will be the 1st in line to win new contracts.

Afterall, there are currently no other large players with Dutech’s UEL and UN certification, as well as Dutech’s low cost production facilities situated in China.

Increasingly, Diebold Nixdorf will focus more on the software that goes into operating the ATMs. This article describes how the company intends to make ATMs even more “high tech”. Expect retinal scans and smartphones linked ATMs in future.

https://www.ft.com/content/621f0f12-f738-11e5-803c-d27c7117d132

As retail space gets more expensive and valuable, Diebold Nixdorf is also focusing on making the actual ATMs or retail information machines smaller and smaller.

NCR Corporation was the largest player in the ATM space prior to the merger of Diebold and Wincor, and post merger, they are now the 2nd largest globally.

A quick look at NCR Corporation’s results tells me that they too, are focusing on services and software, with less emphasis on hardware.

Why are they all moving towards software?

A slide in NCR Corporation’s latest FS tells us the answer:

424) NCR Corporation margin.jpg

As we can see, software division has a 51.1% (what!!) GM rate, followed by services with 21.8%, and finally hardware with 19.9%.

Consequently, software accounts for 64% of NCR Corp’s Q3 2016 Operating Income.

Dutech seems to have taken a leaf out of their playbook, and is growing in the same segment as well.

425) Dutech's revenue mix.jpg

We can see revenue from the “High Security” segment falling gradually, while the revenue from the “Business Solutions” has grown >6 times in the past 3 years.

Their recent acquisition, Metric, will contribute further to the “Business Solutions” division via the Metric UK branch, which supplies and maintains carpark ticketing and management systems.

I’ve previously in Part II, spoken fondly of the services aspect of Metric UK. This is taken from Metric Group AR15, page 106:

426) Metric UK services segment.jpg

Despite revenue from services rendered for the entire group dropping from 2014 to 2015, Metric UK’s share of revenue under services rendered rose from EUR 10.6mil to EUR 12.4mil.

If Dutech can successfuly win more contracts, the benefits are magnified as they take care of the entire value chain for their clients: from manufacturing of the ticketing machines, to the software that controls the ticketing machines to the maintenance contracts, which provide a nice recurring income.

Currently, Dutech’s “High Security” segment still has higher margins than their “Business Solutions” segment, but a large reason for that is the depressed domestic coiled steel prices. I’m expecting Dutech’s overall margins to come down from these lofty levels, particularly so in the “High Security” segment such that “Business Solutions” will eventually enjoy higher margins than the “High Security” segment.


Death Of Cash?

The other concern that some readers have brought up to me is that the world seems to be going cashless. The newer generation seems to prefer credit and other cashless way of making transactions. Will this mean that ATMs will become obsolete in the future?

I don’t think so.

There may be, probably will be in fact, reduced usage of cash in transactions, but ATMs will always be around. I’m guess they’ll evolve to be points of transactions and not just merely for cash related transactions.

It’s kinda like how they said that the dawn of the internet era would put retailers out of business, and that all businesses in future will be conducted online. Since then, sure some retailers are badly affected, but many have continued to succeed. Bricks and mortar malls continue to pop up.

So on the contrary to such opinion, I think the global ATM market will continue to expand, particularly in some of the less developed countries.

This study agrees with me.

http://www.paymentscardsandmobile.com/atm-market-expected-to-reach-21-9-billion-by-2020/

431) Global ATM market.jpg

China, which is one of the fastest growing markets for ATM penetration, has seen a rapid increase in installed ATMs:

432) China installed ATMs.jpg

Large, New Order Contracts For Dutech Soon

OK, this is where it gets exciting for Dutech’s shareholders. There have been some of you who have indicated you’re worried about Dutech’s declining “High Security” revenue.

So was I. “was”.

So I did what I do when I’m worried: I start digging deeper. Otherwise I can’t sleep.

Aside from the fact that it is part of Dutech’s plans to focus on the “Business Solutions”, which by itself is an important point, I am also highly confident that Dutech will soon see new, large orders for ATMs and safes, now that the Diebold and Wincor merger is completed. (well, its not 100% completed because I think there’s still some anti-trust issues to be cleared, but it’s pretty much taken as it is)

Skeptical? Don’t take it from TTI, take it from Diebold Nixdorf’s CEO himself.

This is his response to an analyst’s question during 3Q16 earnings call:

427) New orders from Diebold Nixdorf.jpg

And I quote:

“….. customers were holding off just to make sure that they have a full appreciation of who is their account manager and who they are dealing with…”

“And you can see that a lot of that will come through as orders in Q4 and Q1….”

“…. product side alone, we are currently sitting on a backlog that is substantially north of $1 billion…”

“… I believe that the regional banks in the US will join the party towards the end of 2017, going into 2018…”

Note that this is in his response to a specific question about the ATM business.

How about this other reply from the CFO, also in relation to the most recent earnings call:

428) New orders from Diebold.jpg… I would call it roughly $30 million of product revenue that has pushed out of 2016 into 2017 on the hardware side

Note that this is in response to the North America business only, which is the largest revenue contributor as of 9M16, contributing about 40% of total revenues.

Europe, Middle East and Africa is the next largest component of revenues as of 9M16, accounting for 27%, Latin America accounted for approximately 18%, and Asia Pacific (which includes China), accounted for 15%.


New Orders For NuVinci CVP Transmissions & Further Investments In R&D

Dutech is currently in the midst of securing new orders for manufacturing NuVinci CVP transmissions. The manufacturing is done for Fallbrook Technologies, and the client is reportedly a major European automobile company.

This is what the technology is about, roughly:

http://www.fallbrooktech.com/nuvinci-technology

Dutech’s collaboration with Fallbrook goes back to 2010, when Fallbrook chose Dutech as it’s manufacturer for this transmissions:

http://www.prnewswire.com/news-releases/fallbrook-technologies-inc-and-tri-star-group-sign-manufacturing-agreement-87642687.html

These niche areas provide Dutech with a know-how competitive moat. It is unlikely that lesser manufacturers in China without the engineering know-how can dislodge Dutech. Without the know-how, Dutech’s chinese peers can only compete on price, which is moot as Dutech enjoys the same conditions as them.

And the company is not resting on their laurels. Dutech continues to invest heavily in R&D to be at the forefront of new technologies. Aside from investing in R&D, Dutech has shown that they’re willing to use their cashflows to buy patents that have potential.

This link shows their application to construct a new R&D facility:

http://kjj.tongzhou.gov.cn/KJJ/InfoDetail/?InfoID=e320c914-05b4-4a40-882d-7efaa58cd7a7&CategoryNum=011

(credit to wangnx in Investing Note for bringing this to my attention)

The facility is situated in the proximity of Dutech’s existing 2 production plants, just outside of Shanghai.


Risks

I’m not oblivious to potential headwinds that Dutech may encounter. Thus far, there are almost zero instances where the outlook for a company that I have analyzed is so rosy that I can’t find any potential headwinds.

Life always prepares some curve balls around the corner for us.

Some of the more obvious ones have already been described in CIMB’s report, so I’ll just mention it in passing.

Forex is potentially a headache for Dutech, although the consensus currently is that it’ll be favorable. A strong USD and weak RMB is beneficial to Dutech, as it’s revenues are collected in USD while production costs are in RMB.

We all know Trump’s threat to label China as a currency manipulator. Trump wants a stronger RMB. I am not sure if he’d be successful in this aspect. I don’t think the Chinese really allow any outsider to dictate what they want to do with the RMB. But it’s still a potential threat to note. If RMB appreciates substantially against the USD, that’d be a drag on earnings for Dutech.

On top of that, with their recent acquisition, the company will have increased exposure to the pound and euros, although I suspect the impact is still likely to be very minimal.

The other potential risk that’s been mentioned is the rising domestic rolled steel coil prices, which is a major component cost in the manufacturing of Dutech’s products.

429) China hot rolled coil steel price.jpg

As we can see above, particularly in 4Q16, China’s domestic hot rolled coil steel price has been on a tear, and as of the time of writing this, am still rising. Since steel is a major cost component for Dutech, this means that Dutech’s margins for the safes and ATMs will likely come under pressure.

On a bigger picture though, China’s coil steel price is still relatively moderate when looking at multi year data. I can see how forward quarters in 2017 will show stagnant or reduced GPMs due to this though.

I don’t know if the company hedges it’s steel. Someone on Investing Note told me that they do, but there’s no data that I can find. The company doesn’t announce it’s hedging strategies, if any, in their AR either. And that someone who told me couldn’t substantiate either, except to say that he read it somewhere.

So I’ll just assess their material costs at spot prices. Anyway, all these prices, even if they are hedged, eventually flows down to their costs so for a long term investor, it doesn’t really matter.

What I will spend more time discussing here, and this is something that hasn’t been brought up thus far, is the negative impact of China as a risk factor.


Negative Impact Of China’s Regulations On Global ATM Manufacturers

In 2016, China introduced new regulations that prohibit foreign ATM vendors from operating in the country, unless it’s done in collaboration with a domestic partner.

Yup, essentially the chinese government supported domestic ATM vendors by putting insurmountable obstacles to foreign vendors.

This is taken from one of the articles I found regarding the regulations:

New state guidelines influence deployer choices

Domestic suppliers also had a strong year in the wake of guidance from the China Banking Regulatory Commission (CBRC) regarding “controllable IT”. Controllable IT means that a machine’s parts must be manufactured in China and data must be contained within the country at all times. The 2014 guidelines state that banks should increase the share of “controllable” IT equipment by at least 15% annually from 2015, to account for at least 75% of all IT equipment by 2019.

Gotta love the euphemism: “guidelines”

All these had a substantial impact on all the major ATM vendors: Diebold, Wincor and NCR Corporation.

This is taken from Diebold Nixdorf (the merged entity)’s latest 3Q16 results:

430) Diebold growth in revenue from Emerging Markets.jpg

As we can see, growth in revenue in Asia Pacific is 28.7%, which looks like it’s not too bad, but it’s a substantial drop from previously. Previously, AP used to be the largest growth centre, with China showing the most rapid growth in ATM penetration.

Figures from the People’s Bank of China show a total of 866,700 ATMs online in 2015, up 41 percent from 2014. Since 2013, China has claimed first place as the world’s largest market for payment cards and ATMs, according to People’s Bank data.

Market share of the global ATM manufacturers in the China market was growing at a health clip as well before these new regulations halted their growth. In fact, they were all in the top 5 vendor list except in 2015 and 2016, when these new regulations came into play.

I’ll digress here a bit. China is behaving like a big bully these days. Am I the only one who can see that in the various business I have analyzed that have exposure to China? They can terrex anything they like, ignore international court rulings on the South China Sea and whatever obligations they may have signed with WTO regarding free markets.

This move sure doesn’t look like a free market move to me.

The top vendors in terms of market share in China as of 2015 are:

  • GRGBanking (27.85 percent);
  • Hitachi (13.35 percent);
  • Cashway (11.49 percent);
  • King Teller (10.94 percent); and
  • Yihua (10.82 percent)

431) china ATM vendor market share.jpg

The reason how I found out about these new regulations is because I was looking at China as 1 of the growth areas, and this pie chart just doesn’t make sense to me.

You’re telling me that Diebold, Wincor and NCR, the global leading players who have a relatively large portion of their profits put into R&D annually, with their experience and know how, can only garner 3.65%, 1.91% and 1.99% of China’s domestic market?!

It’s essentially an uneven playing field.

GRGBanking is the dominant player with 27.85%. So I dug deeper. Who exactly is GRGBanking?

http://www.grgbanking.com/en

From wikipedia:GRG Banking is a Chinese listed state-owned enterprise, specialized in the financial self-service industry. GRG Banking is engaged in R&D, manufacturing, sales and service, software development for ATMs, AFCs and other currency recognition and processing equipment.”

State-owned enterprise. Right. No wonder. Talk about an uneven playing field.

It’s like a Man U vs Liverpool match… where the referee and linesmen are all Man U diehard fans.

BTW, since I’ve compared Dutech’s valuations to Gunnebo’s in Part I, I thought it’d be interesting to take a look at GRGBanking’s as well.

GRGBanking: PER (on 3rd Jan 2017) is 21.11, it’s P/B is 6.16 times.

Here’s the FSs to substantiate the figures above:

grgbanking-fy16q3

grgbanking-ar15

Crazily high valuations compared to Dutech’s. And they may have the Chinese government’s backing, but it’s hard to see how they can succeed outside of China whereas Dutech has a fast growing global footprint, with valuations that’s a fraction of the above figures. (P/B is 6.16x !)

Anyway, in response to these chinese regulations, the global players started forming joint ventures with local chinese companies so that they can continue to expand in China. These global players do so by taking a minority stake in a JV, hence putting the control of the JV in the hands of their chinese counterparts.

Diebold formed a JV with Chinese tech company Inspur Group:

433) Diebold JV with Inspur.jpg

While Wincor formed a JV with Aisino Corporation:

http://www.wincor-nixdorf.com/internet/EN/WincorNixdorf/Press/pressreleases/2016/aisinoen.html

This means that the merged entity Diebold Nixdorf, now has 2 JVs with 2 separate chinese groups, both of which they are the minority shareholder.

This sucks for Dutech, as it means that at least with respect to China, Diebold Nixdorf will have to send manufacturing orders to their respective JVs and not utilize Dutech.

From what I’ve read about the details and structure of the JVs, and trust me I have read it all, it basically confirms to me that Dutech will not be seeing new orders from Diebold Nixdorf’s expansion in China.

Digging deeper, this basically confirms my suspicions:

434) Diebold business in china.jpg

This does not mean that I’m expecting Dutech’s china business to decline. It means that Dutech will not win NEW orders in relation to the growth of Diebold Nixdorf’s ATMs in China.

Most of Dutech’s current sales in China is done in the Free Trade Zone, and the bulk of these are exported eventually anyway.

So in this regard, I’m not predicting a Chinese headwind. I’m predicting the absence of a Chinese tailwind.


CONCLUSION

Alright, this concludes my updated analysis on Dutech. I intend for Dutech to be a long term core holding, and am not expecting to divest anything anytime soon.

Of course, if Mr Market comes along and offers me a deal I cannot refuse tomorrow, I’ll be inclined to change my statement.

Currently I own 630,000 shares, at an average purchase price of $0.291, having added 30,000 recently at $0.465 and another 30,000 at $0.445.

As always, I welcome thoughts, opinions and anything else you know that I might have missed out.

Happy Hunting!

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:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11215-investor-guru-thinking-differently-from-when-i-first-started-out

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:

418-metric-group-financials

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)

metric-group-ar-2015

metric-group-financial-statement-2015

metric-group-fyq16q1-results

(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.