Stock Analysis on Dutech Holdings: How to Invest in our ATMs?
2016 is the year of Fintech. It has been one of the most revolutionary market changer and I have been keeping my eye on the electronic payment services. In Singapore, ApplePay and AndroidPay were recently launched and they are grabbing market share very quickly, while in China there is WeChat. With the convenience of paying with your mobile phone, the days of credit card may be numbered.
I still draw cash from ATM every week. What about you?
However, I’m positive that physical cash would be around for at least another 5-10 years because many of small merchants are still relying on cash instead of electronic payments.
This is where I chanced upon an interesting company – Dutech Holdings (SGX:CZ4)
Company Profile
Dutech is a manufacturer of high security products such as ATM safes, banking safes and other cash handling systems. It also recently went into the design and manufacturing of intelligent gaming and ticketing terminals (basically jackpots). Other than cash handling safes, they also provide weapons safe to two major weapon safe brands in US.
Source: CIMB
Big Fish in a Small Pond
One thing that stands out immediately is the niche market of safes or cash handling systems. According to the annual report, Dutech is the largest producer in terms of sales and production capacity. In the rising trend of reducing manpower, I think Dutech is in a very good position to capitalise on the increasing use of self-service terminals.
While Dutech is a Chinese company, it is also based out of Germany. In fact, it has acquired 3 German firms in the recent years to expand its customer base and attain more in-house R&D ability to develop better gaming and ticketing terminals. Its aim is to achieve vertical integration so that it will not longer just produce the safes for the terminals, instead it will produce the whole terminal and provide one stop solutions for its customer.
Confidence in Chinese Company?
Before going into the financial, I want to highlight that Dutech is an S-chip, meaning it is a Chinese company listed in the SGX. Naturally, this comes with the concern of accounting fraud and bad manangement practices which are common in Chinese companies. However, after researching about the company, I am quite confident that Dutech is not one of those crappy companies. Below are my three main reasons for having confidence in Dutech as an S-chip.
- Global Business. With its acquisition of German firms, Dutech now has production facilities out of both China and Germany. In addition, it also has a global customer profile, including big names such as Diebold, Wincor Nixdorf, Winchester and Liberty Safe, which means international companies are trusting Dutech as a business partner.
Source: Dutech Annual Report
- Significant Insider Ownership. One of the key risks of S-chip is the company management. A crook CEO could squeeze all the money out of the company and shut it down, leaving nothing to the shareholders. However, in the case of Dutech, this risk is much lower due to the fact that his Chairman-cum-CEO, Dr Johnny Liu is also a major shareholder and owns more than 40% of the company. This will also ensure better alignment of the management’s interest to the shareholders’. (Dr Liu has a direct interest in Dutech through his company Spectacular Bright)
Source: Dutech Annual Report
- Strong Management. In 2011, Dutech acquired Format, a German safe producer and also a direct competitor. Previously, Format was incurring losses however Dutech managed to turn about the company finances in 2 years. This is a strong testament to the ability of Dutech management in M&A.
Strengths
- Increasing Profits. Overall, its Earnings Per Share has been on the uptrend. Good sign.
- Positive Cashflow. The operating cashflow is positive and increasing. This is particularly important as it shows that the earnings are high quality and the company liquidity is healthy
- Good Return on Equity and Asset. Their ROE and ROA are 18% and 13% respectively. Nothing to shout for but good enough
- Low Debt Level. This is the most encouraging. Despite their multiple acquisition of other firms, their debt level is amazingly low. It is about 8% debt to equity. This should protect them well should the interest rate goes up in the near future.
Threats
- Subjected to Steel Prices. Dutech’s ability to generate good profits depends largely on the steel prices. The cost of steel accounts for 40% of the total operating cost. For example, in 2011, they had a poor performance due to elevated steel prices. Fortunately, steel prices have been retreating since then but we cannot assume that steel prices will remain low forever.
- Reliance on Key Customers. While Dutech has a strong relationship with its top three customers, I noticed that its top three customers contribute to about 35% of its total sales. Hence, should any of the top three customers bail on them, it would have great impact to the company’s sales.
- Currency Risk. Dutech’s sales are primarily US-denominated while they report earnings in Renminbi hence a strengthening US dollar is in its favour. However, with the booming China market, I am not sure how long can the Renminbi remain suppressed at the current levels. This will have some impact on its future reported earnings.
Is Dutech still a Buy?
Ever since our friends in CIMB did a coverage on Dutech, the stock price has shot up about 60%. As of 31 July, it is at 46cents. Based on a growth rate of 12% on its earnings, my DCF calculation comes up to 70cents. So it is still undervalued in that sense.
Hope you have a better understanding of Value Investing. If you are interested in learning more about value investing, we are holding a free workshop on the 20 Aug. Hope to see you there!
Disclosure: I currently do not own any Dutech Stock, though I must admit that I’m looking at it closely!
See you soon!
Investing Always,
Pete
