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Monday, 30 April 2007

2nd Cigar Butt, Surface Mount Technology's 2Q Results in November 2006

I bought Surface Mount Technology at about 15% below NAV. Its ROE used to be above 15. 2Q earnings nearly tumbled 40%. What went wrong?

Apparently, Surface Mount Technology, operating in fiercely competitive EMS market, was facing a profit margin squeeze too (a keen to United Food) . On one hand, its facing escalating prices and shortage of raw production material. The shortage arose because suppliers do not hold much materials in stock due to highly volatile prices.

On the other hand, Surface Mount Technology was facing pricing pressure to maintain market share. The end result was profit margin squeeze and hence tumbling profits.

Without a clear and viable strategy to compete with its rivals, it would be difficult for Surface Mount Technology to reverse the trend of dwindling profits.

Share price of Surface Mount Technology subsequently tumbled to slightly over 30 cents, or nearly 50% NAV, earning it a seat in the cigar butt category too.

This brings my cigar butt count in my portfolio to 2:
  1. Surface Mount Technology
  2. United Food Holdings



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