Computime Group
Computime is a Hong Kong listed company manufacturing electronic control
products. It operated in two segments: a) Smart Solutions and b) Contract
manufacturing services.
‘Smart solutions’: Building, home control, and appliance control
products (‘Internet-of-Things’ or IOT devices). It generates 36% of sales.
‘Contract manufacturing’: Commercial and industrial control products,
generating 64% of sales.
The company generates 50% of sales from Europe, 30% from North America, and
20% from Asia.
Sales have been stable at $3.2b. Ebitda margins have averaged 5-6%
resulting in $169m in the last year.
Net profits, however, have been anaemic in the last two financial years
– at $10-11m – primarily due to a reduction in gross profits. The US-China
trade tensions (some of the company’s products were hit by 25% tariffs) and
Brexit caused apprehension in the US and European markets causing customers to
be more conservative with orders and shipment scheduling from China. Sales
reduced further due to the effects of the pandemic.
The financial position is fair with $293m in cash net of borrowings. The
current liabilities (including current lease payments) are substantial,
however, and just about equal liquid assets (current assets net of
inventories). Adequate attention seems to have been paid to inventory and receivable
provisioning.
The net current asset value was reported as $646m (net of all
liabilities). The equity sells for $286m or 44% of net current asset value and
about 5x average net earnings (over the last five years).
Management of this company have a penchant for issuing share options to
directors at ever lower share prices – with 2m share options offered at
$0.305/share (near current price). Though this is limited to 1% of issued
shares per year, they are authorized to issue an aggregate of up to 30% of
issued shares for options. Currently about 10% of issued shares comprise
options.
Dividends were commensurate with earnings, but have dropped in line with
recent earnings – yielding 5% on the current market price.
Management have indicated a “transformation” in business strategy to
focus more on the B2C segment rather than B2B as it has done in the past.
This indicates substantial operating risk, and less reliance to be accorded to
past operating results.
Considering the dynamic and competitive nature of the industry - along
with poor recent earnings, which may not recover (see above) - we prefer to
avoid this apparently undervalued stock and focus on other more obvious
bargains.
$ represents Hong Kong $