Dutech Holdings

TTI’s Options Strategy – Results Thus Far In 2017

2017 has been kind to me thus far. Both my large positions in my recent investing ideas came out tops and their share prices exploded significantly.

Dutech Holdings is up about 85% since I bought it a year+ ago. I wrote about the company in June 2016, and  most recently updated my thoughts in a comprehensive series.

Dutech Holdings Investing Thesis

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)

Dutech Holdings – What Lies Ahead? Part III

Dutech Holdings Part I’s title is no longer relevant. Cos the profit is no longer $117k with the run up. It’s more like $180k as I type this. Yet, I haven’t sold a single share.

Geo Energy Resources also performed spectacularly well, and is up a massive 75% since I bought it just 3 months ago

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

Right now, I’m eagerly awaiting the upcoming earnings season to kick in (sometime this or next week), then it’s going to get real busy as I dive in to digest each result. I feel like a parent waiting for my kids’ PSLE results. These “kids” of mine are genuises. The rest of the market just hasn’t realized it yet. But they will come around eventually. Starting with PSLE.


446) option-1010899__340.jpg

I’ve also had a series of nice wins in my options strategies. I’ve utilized an option strategy for the US and other larger markets for the past 3 years or so now.

It’s been a long journey, but I’ve since developed my personal brand of strategy which has thus far (*touch wood) been working like a gem, generating consistent cashflow of between $3k-$8k USD every month for me, while putting $200k USD of capital to work.

When I started utilizing options, for a couple of months I had a series of nice wins. It encouraged me to commit more capital, and I got bolder and bolder, choosing contracts with high volatility and their accompanying large premiums, until 1 big fine day, 3 months into utilizing options, the markets turned against me and I pretty much lost ALL the gains I made… in a single night. (All thanks to Herbalife!)

Ouch.

That was extremely painful. I’m not used to a realized 5-digit USD loss in a SINGLE night.

Needless to say, I dived deep into analyzing my strategy and developing over the past 3 years, and now I’ve a certain brand of options strategy that is probably not commonly used, but is probably not unique to myself either. Anyhow, it works for me, and that’s all that matters.

I have previously mentioned about options in a simple guide, so if you’ve no idea what I just said, here it is:

TTI’s Basic Guide To Stock Options


Honestly, I’m not sure why very few people (to the best of my knowledge at least) utilize some form of option strategy. I guess people fear what they don’t know or understand.

But, IMO it’s really not that difficult to understand, although the specific nuances of it would probably need some experience too grasp, yet the rewards can be disproportionately large.

Best of all, I like the time decay portion. When WB bought Gillette, he said he likes to think that as America slept, there would be millions of guys waking up the next day with a bit more facial hair, needing Gillette’s products.

Well, that’s what I feel about options too. As I sleep, the liabilities (ideally) gets reduced by time decay, while I pocket the nice fat premiums and am free to re-invest the premiums.

I know that I’m not the only guy doing this, because in some of the Straits Times news feature on some investors, they mentioned something similar. There are some very wealthy individuals whom I know do something similar to what I’m doing too.

Sure, our strategies will probably differ a bit, but just from the simple few sentences they mentioned, I can tell we’re all probably on the same page somewhat.

Some of my friends have asked me to teach them in a cursory manner, and while I’ve attempted to, they don’t seem to really understand or dare to try.

I guess it’s not hard to see why. Options are derivatives with possibilities of leverage. And leverage, is akin to a bad word for many investors. It’s scary. Sure. There are horror stories everywhere when it comes to leverage.

Which is why, in my thinking, it’s all about managing risk. In fact, I had to seek advice and read some books on statistics recommended by my friend, who is an actuary. She also kindly explained to me what goes on behind the scenes when insurance companies come up with policies and how they determine their premiums. All very interesting to me.

Because, in a nutshell, my option strategy, means I’m essentially the insurance company selling insurance to anyone in the world who wants it.

In fact, my option strategy is even better. Because I can even choose to pass on the liability for the “insurance contract” to someone else, if there’s a likelihood of a claim on the insurance. Insurance companies can’t.

Of course, once in a while, stuff happens and as an “insurance company”, you’ve to start paying out. But the premiums you receive are supposed to far outweigh the payouts in the long run.

It’s all really just about stats and managing risk.


445) TTI's options.jpg

I track my options in a table that looks like this.

The “unshaded” rows are contracts that are still active, while the “shaded” ones are inactive/expired.

The coloured codes are for contracts that are related, i.e. selling and covering the same contract.

In Jan 2017, I collected a total premium of $6,819.54 USD

Amongst all the contracts, I’ve only had to cover 1 that was unprofitable. That’s the pink one for Valeant, in which I lost $43.10 USD. The rest were all highly profitable, with many contracts with high premiums totally expiring, which is kinda like an insurance policy that expired without a claim on it: the insurance company pockets the premium and kindly asks if you’d like to extend your coverage.

I’ve had 3 options assigned, resulting in a net purchase of 9,000 shares of Chesapeake Energy, and 400 shares of Valeant Pharmaceuticals.

The 9,000 shares of Chesapeake Energy though, are shares that I’ve held, and previously sold in another option contract that got exercised in Dec 2016. So I’m just sorta buying back what I’ve been contracted to sell previously.

All this while collecting premiums on both the buy and sell contracts. Fine piece of business I’d say.

The 400 shares of Valeant is a new addition to my existing position. I wasn’t contracted to sell previously. But I already have the intention to add to my Valeant position (this is recorded in the “Transactions” page) anyway, so getting this exercised is fine with me, plus I get to pocket the premium and I’ve swung to sell a Call Option on this (As shown in the table) (On a related note, I’m still getting whacked on my Valeant position, but I’m a damn stubborn guy and I still think I’m going to come out tops. We’ll see.)

You might also notice that practically all my options activities revolve around just these 2 companies.

This is because I believe that for it to be done safely, options still require the usual deep value analysis, and thorough investigation; no different from what I’d do before I’d buy the equity of the company.

Afterall, options ARE derivatives. And their intrinsic value is derived from the equity.


On a different, yet related note… (and I’m trying to illustrate something here with a real life example, not trying to identify anyone)

Around the time when my Dutech Holdings Part I thesis was posted, the share price then was around $0.45. Someone told me that I’d better sell cos the “trend is very bearish”. I very politely begged to differ. He ended with an ominous “All the best then”. (He meant it genuinely, I believe)

Now, I’d be an abject failure if my months of research into the company can’t provide me with the confidence or arrogance to dismiss naysayers. Particularly those who rely solely on the stars and godly celestial beings in the form of squiggly lines to tell them their fortune.

When the share price rose to $0.48 or thereabouts, the same guy screamed “its always wise to lock in profits when you can!”

When the share price rose yet further to $0.50, there’s a sudden change. Suddenly, he’s telling me “looks like it’d breakout! watch for it! If it does breakout, it may go higher!”

Wow. Seriously wow. That’s like a sentence only Donald Trump makes. Lots of words with absolutely zero meaning. Maybe I can come up with some of these myself:

“If it doesn’t breakout, it may go lower! But there’s also a chance it can stay flat here to provide some support! Be careful if it goes past this support though, because there’s a likelihood of it going much lower!”

Anyway, to conclude the story, finally, at $0.535 (today), he’s saying “Very bullish! This is going to go higher and higher! Likely to make new highs! Target Price: $0.XX <–“XX” is some new crazy large number that I think the gods told him.

The net effect of all this, is that NOW I’m starting to getting cautious about my Dutech position if even the gods think it’s going straight up to heaven…

The above is a true story. As ridiculous as it sounds. I edited the comments so that it’s not exactly the same, cos I don’t want to identify the individual.

In his defence, even the pros make such statements.

There’s a long statement by El-Erian some months ago about his outlook on the economy. And it’s so long it took up like 4 lines of the Bloomberg article, and basically it says “the economy can go up from here, but I won’t be surprised if it goes down either. There’s a small chance it can also flatline and trend, which investors would be wise not to discount…. blahblahblah.”

Well, not exactly like this, but similar. I tried finding the article to substantiate but it’s some time ago and I can’t pinpoint the exact title so can’t find it. But I remember sending that to some friends and we totally had a good laugh at it.

Imagine if doctors can act like that:

“There’s a chance that this radio-opaque lesion is cancer. We have to monitor it closely, but don’t be too worried because it may not even be cancerous either. It can grow and spread quickly, although I won’t be surprised if it stays the same when we take a review x-ray in future. We gotta remain vigilant though, and not forget that there’s always the likelihood of metastasis with this being fatal eventually, although at this stage this likelihood is not high.”

So when you’re on your deathbed, the doctor can tell you “I told you it can grow and spread quickly right? I told you there’s a chance it can get fatal right?”

How reassuring.

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!