Month: January 2017

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.

TTI’s Multi Year Record Of Dividends

This post was republished on NextInsight:

407) dividends.jpg

With the end of 2016, I can now update my long term record of dividends:

23/5/2012 Asia Enterprise Holdings $945.00
11/6/2012 Wells Fargo $195.70
16/7/2012 Tesco $1,771.64
17/8/2012 Metro Holdings $6,000.00
22/8/2012 Boustead $1,800.00
12/12/2012 Boustead $2,000.00
28/12/2012 Tesco $1,799.93
20/5/2013 Apple $528.00
20/5/2013 Hock Lian Seng $1,800.00
28/5/2013 Sing Tao $1,257.46
24/6/2013 Flyke International $415.00
1/8/2013 Metro Holdings $8,000.00
20/9/2013 Sing Tao $1,515.00
20/11/2013 Lion Teck Chiang $1,300.00
12/12/2013 Boustead $1,039.60
19/02/2014 Hopewell Holdings $393.00
22/05/2014 Hock Lian Seng $10,610.00
10/6/2014 Lion Teck Chiang $2,376.00
18/7/2014 ICBC $14,034.00
12/08/2014 Metro Holdings $20,900.00
18/08/2014 King Wan $14,900.00
09/12/2014 King Wan $6,930.00
23/12/2014 Tesco $471.56
28/01/2015 Boustead scrip dividend (15,189 shares)
21/05/2015 BBR Holdings $13,568.00
21/05/2015 Hock Lian Seng $39,880.00
22/05/2015 CDW Holdings $3,661.81
12/06/2015 LTC Corporation $2,376.00
26/06/2015 Dutech Holdings $2,509.65
11/08/2015 Metro Holdings $20,880.00
18/08/2015 King Wan $9,900.00
20/08/2015 Boustead Singapore $1,012.64
15/09/2015 Libra Group $454.00
18/09/2015 CDW Holdings $2,811.60
02/10/2015 Restaurant Brands International $292.00
05/01/2016 Restaurant Brands International $177.12
27/01/2016 Boustead Singapore dividend in specie (BP) NA
20/05/2016 BBR Holdings $6,930.00
20/05/2016 Hock Lian Seng $18,630.00
30/05/2016 CDW Holdings $3,787.94
24/06/2016 Dutech Holdings $5,643.00
17/07/2016 Libra Group $635.60
19/08/2016 Boustead Singapore $1,025.52
23/09/2016 CDW Holdings $489.41
22/11/2016 LTC Corporation $2,176.02
09/12/2016 King Wan $4,950.00
09/12/2016 Boustead Singapore $256.38

2016’s total dividends received in reality, should be somewhat higher as I did not include the Boustead Project shares received as dividend in specie. That works out to be a few grand.

For 2016, approximately $4,000/mth in dividends is reasonable. Not fantastic, but not too bad either. Can’t complain too much about it.

2014 and 2015 had unusually high dividends (as a proportion of the total portfolio value) due to the use of leverage. The leveraged amounts are obviously backed out from the total portfolio value for it to be an accurate representation, but this leverage does still generate dividends, which explains for the unusually high amount of dividends.

Going forward for 2017, without leverage, I’d expect the total portfolio dividend amount to stabilize around the $55-60k+ mark, based on a portfolio amount of just over $1mil, which works out to be a yield of approximately 5%+.

This is pretty ok considering that I do not particularly seek out high yielding counters like REITs, instead, preferring to focus on value situations.

I’m expecting the total portfolio value to grow more rapidly in 2017, probably around the $1.3mil – $1.5mil mark by this time next year.

Largely because I’m optimistic about my performance in 2017. But then again, I’m optimistic every year anyway. :)

The general market is expecting 2017 to be a year of increasing interest rates worldwide. I don’t think there is much opinion that strays from this theme. There is some debate though, regarding the pace of such interest rate increases.

My own opinion is that it’d be similar to 2016: We’d see 1 or 2 rate increases for 2017 but no more. And that’s lesser than the consensus currently. The markets are expecting much more rapid rate increases for 2017.

My other general opinion (that’s not really substantiated or researched!) is that the rate rises means that going forward, it’d be an increasingly tough environment for REITs as an asset class. 

In fact, any asset class that behaves like fixed income (bonds) will not do so well in such an environment. That’s an opinion that Bill Miller has as well:

Anecdotally, it seems to me that in the local context, REITs are over-invested as an asset class. Again, I’d emphasize this is just an unsubstantiated vibe without any of the extensive research SG TTI has come to be known for.

It’s just that when talking to anyone who has any form of investments in the equity markets, I’ve not come across anyone WITHOUT any exposure to REITs at all, and in fact, several have almost exclusively invested in REITs.

I’d be a bit more cautious in this regard. But then again, I haven’t had much any experience with REITs, aside from my brief research when I was comparing Centurion Corp’s potential divesting into a REIT, compared to other REITs (Centurion Corporation Investing Thesis Part III)

Also, I’m talking about general themes here, not specific companies. Of course, even within a sector that is facing a tough environment in any 1 year, one would still be able to find a few companies/REITs that still perform very well.

With rising interest rates, I’m expecting mortgage rates to rise as well. Coupled with a tough employment scene locally, this is the perfect toxic environment for the property sector in 2017.

It’s weird to use “perfect” together with “toxic”, but that’s exactly what it is for someone hunting for another property. Like most people, I am servicing a mortgage currently, so I am affected as well by rising rates. Yet, like all potential buyers, I’m cheering each time the quarterly real estate index shows a new drop.

Talk about mixed emotions.

Singapore’s unemployment rate has steadily rose and it’s now at 2.1%, the highest since the 1st quarter of 2014. It’s hard to find positives in this regard for 2017. I don’t think it’s going to improve.

I’m sure many business owners and/or management would agree with me. Most of us have a front row seat to the general singapore economy. When economic conditions deteriorate, the business owners are the 1st to notice it, way before the actual economic data confirms it.

So that means there’d be more defaults, more firesales, more negative sentiment. When your job and the resulting cashflow is threatened, the very last thing you’d have on your mind is committing to big money liabilities like property.

I think I’d be able to find some deals in this regard.

49) skyline-1402050__180

I’ve always said that property buying is like big game hunting with a single bullet. You got only 1 shot at any 1 time, so you’ve to make that count.

It’s no good having 10 “not too bad” or “almost firesale” options. It’s much better to have 9 “non firesale, poor” options and just 1 excellent option which is a deep firesale, and fulfills all your needs.

From the recent emails I’ve received, some of you have also indicated that you’re looking out for deals in the property sector, so I guess I’m not alone.

Quick tip if you don’t already know this: For couples who intend to own an investment property, put 1 of the property solely under your own name and the other solely under your spouse’s name. Not Joint owners.

This allows you to avoid paying for ABSD as each property is then considered as the “1st property”. If both of you are joint owners of the 1st property (as is normally the case), then the 2nd is considered as the 2nd property for both of you and thus is liable to all the related additional taxes.

Of course, this means that your eligible loan quantum is much lower as only the earning power of the single owner is considered by the bank. I think it’s a good exercise to help you not over stretch anyway. So it’s not a bad thing.

If for whatever reason, you do still need to have both spouses named as owners of the 1st property, you can also proportion it such that 1 spouse owns 99% of the property, while the other own 1%.

If you need to convert to sole ownership in future, the 1% spouse just has to sell his/her 1% to the other spouse based on the valuation sum. The related taxes are all based on the sale quantum, so at only 1%, the costs will be very reasonable.

Although perfectly legal, I think this is somewhat frowned upon though as a way to get around the rules, so I shan’t espouse too much about it here.

Also, TTI accepts no responsibility if your spouse decides to run away with the 100% ownership of the property in future… (hahaha. Always consider black swan events…)

In my next post, I’d probably go back to doing another deep value analysis so stay tuned…

Here’s wishing all readers of SG TTI a fruitful start to 2017.

May we all trash the markets in 2017.