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Monday, 30 April 2007

Armarda Special General Meeting on 3rd February 2007

This special meeting was originally called to get shareholders to vote (in favour) of allowing Armarda to form a joint venture with FESCO group in China, a provider of HR services.

The joint venture would see Armarda and FESCO group setting up an subsidiary to provide IT services to FESCO group. Armarda would own 45% of this new subsidiary and the latter would provide a steady stream of income to Armarda in the foreseeable future.

I managed to find out more about Armarda at this meeting than I would from simply googling around and reading Annual Reports. Armarda had about 80 million HKD, translating to about 5 cents (SGD) per share, while Armarda was trading around 4.5 cents then. It was flushing with cash!!! Things were not that simple thougth. The cash was real, no doubt. BUT, 40 million HKD was declared as paid up capital when Armarda ventured into China in 2004 (the year it IPO). This 40 million could not be touched unless the company wind up. 20 milliong HKD was required as working capital to operate the business. Only 20 million was left. Most of this 20 million was generated from business operations in China. Since Armarda was enjoying tax breaks in China (i.e. paid little or no tax), they could not move the cash out unless they pay a heavy charge for the remittance.

In other words, Armarda had cash, that it could not use. In order to form the joint venture with FESCO group, Armarda had to enter as a foreign entitiy. This meant that cash from Armarda had to be injected from outside China, and not from the cash it already had in China. Hence when Armarda need the 18 million RMB (about the same as HKD) to enter in the joint venture, Armarda had to raised this amount via placement (instead of using internal funds).

Unless Armarda start paying tax (another blow to its profit attributable to shareholders), the company would have problem taking funds out of its China operation. To simple shareholders, this meant that it would be next to impossible for Armarda to pay dividend in the immediate future. For the business, it would be difficult to invest in business opportunities outside China since its funds outside China was severly limited. Thus Armarda was not so cash rich after all.

Though not cash rich as it seemed from the financial statements, I was still confident of Armarda in the long run. Since I bought Armarda at an average of 5.2 cents per share, this price was not far from the averaged trading price of 4.5 cents in a period where Armarda's profit after tax had more or less bottomed. In this Q3 2006, Armarda's core business was generating about 300 thousand HKD while the 25% of BTL it acquired previously was giving it about 1000 thousand HKD per quarter. Armarda's profit per quarter (when it had been consistently giving profit guidance) before the acquisition was about 1000 thousand HKD. In short, Armarda's profit had bottomed out. Thus, going forward, I would expect Armarda's profit to be much more than just 1000 thousand HKD, due to profit from BTL and the joint venture with FESCO.

Anyway, at current business performance where its core business is almost insignificant, and with my average cost of 5.2 cents or about 50% NAV, Armarda is just another cigar butt in my portfolio.
  1. Surface Mount Technology
  2. United Food Holdings
  3. Armarda

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Blogger dongdong said...

Would you consider Valuetronics? It is also in the "ODM" (Original Design Manufacturing) services - better profit margin. Maybe can look at it's intrinsic value. But dun know why ppl here dun like HK-based company.

4 May 2007 at 23:03  
Blogger Market Uncle said...

I normally do not consider IPOs, simply because they do not have an established track record to justify my to bet on their future.

There was a fable regarding IPOs:
A farmer went to see a vet with his sick horse. "What's the problem?", asked the vet. "Sometimes it ran, sometimes it doesn't. What should I do?", replied the farmer. "Sell it when it's running", advised the vet.

This is what happen to many IPOs.

Anyway, I did take a quick look at valuetronics and this is what I got:

The company is a china-based EMS player, ie. a contract manufacturer in telecommunications, industrial & commercial electronics and consumer electronics industries. Clients include AT & T, Honeywell, Motorola & Philips. US companies made up of 90% of their customers.

They claim their competitive advantage as in design and development:

Quoted from The Edge:
"Unlike traditional contract manufacturers that do mostly original equipment manufacturer work, Valuetronics prides itself on initiative and innovation."

"To distinguish ourselves from other EMS provides, we involve ourselves very actively in our customers' product development cycles... This involvement can range from suggesting alternative component sources and identifying new markets to , at times, developing new products. Ultimately, the company aims to be involved in the entire process of product development."

The question is thus:
"Getting involved in the design process can be counted as competitive advantage? Is it enough to stop the clients from moving to other players?"

If the answer is a yes, than valuetronics might be worth conidering. However, it'll normally take a few years for this competitive advantage (if any) to show up in consecutive years of consistent good performance.

The reason is EMS is also one of the many businesses that are highly competitive. Other than one or two good leaders, many face profit margin squeeze after a few good years. The margin squeeze is due to rising cost of operation, or pricing pressure to maintain market share (e.g. Surface Mount Technology)

6 May 2007 at 00:41  

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