While the ratios presented below may appear attractive, the company in 2009 was deeply cash-flow negative on an operating (pre-investments) basis primarily due to end-of-year accounts receivables that were nearly 4x higher than in 2008, dividend payout dropped from 35% to 15% (and dropped by 20% in dollar terms), and to fund investments and remain cash positive the company had to obtain S$69 m in short-term financing, quite likely from a related entity as no terms were disclosed in the accounts other than that the loan is unsecured. Note that the days receivable and days payable figures below take the average of the last two FYE accounting periods. Taking only the last FYE figures, days receivable and days payable would be 130 and 56 days, respectively.
There are three serious corporate governance issues (discussed in addition detail below) that investors should be aware of: 1) Company has made a request to change auditors; 2) Company requests grossly excessive discretion on non pre-emptive and pre-emptive share issuances (20% and 50%, respectively) with no limitation on discount; 3) Some years FYE company accounts as well as the Company M&A document are not available online at Company website or at SGX.
The macro characteristics of in-automobile and portable DVD and video players are not compelling. Although demand is likely to grow (in line with growth of vehicle sales), DVD and video players are regarded as low-margin, generic products. Also, these single-use players may over time be threatened by touch-screen computers able to perform many more functions.
The Company’s sales are over 80% attributable to the US, where it supplies units (primarily in-automobile video and DVD players) to 3 clients that constitute approximately 80% of sales. The company’s largest customer is Audiovox, a US-listed company with a very poor profitability record. In two of the last 6 years, including in 2009, Audiovox was loss-making. The Company’s two other key clients, Thomson and Zenith, are also regarded as low-end electronics suppliers. These three key clients in turn rely heavily on sales to US hypermarkets, particularly Wal-Mart. Wal-Mart is infamous for its ability to squeeze margin out of its suppliers.
Action Asia is probably a “price taker” rather than a “price maker” on all of the products it manufactures as it is likely to compete with dozens of factories (particularly in China) manufacturing similar (if not identical) products. The company strategy described in its 2004 IPO prospectus has only partially been fulfilled, as the company has not succeeded in diversifying its customer base or geographic distribution of sales. However, this is a volume business and the company has been successful in increasing volumes and improving operating margins.
The Company’s heavy reliance on the North American auto sector is a potential area of concern. The Company’s strong sales in 2009 may have been largely attributable to US Federal stimulus packages to facilitate the sale of new vehicles. In the next several years most growth in new vehicles is likely to take place outside of North America, where the Company does not currently have established sales channels.
The Company is geographically dispersed. Its listing entity is in Singapore, manufacturing facilities are in Malaysia and China, the principal (related) shareholder is listed in Taiwan and significant sales seem to be managed out of Hong Kong.
Labor costs in Southern China (where the Company has a key factory) have recently been increasing. China and Malaysia are both likely to see appreciation of their currencies relative to the US dollar. However these issues may have a neutral impact on the Company as they will similarly affect its competitors.
Internal Evaluation of the Business and its Constituents
The Company is principally managed and owned by family members. From reading company accounts, it is difficult to determine to what degree the company has genuine management depth versus being a one-man show. Overall strategic management and the relationship with three key customers may remain the responsibility of the Non-Executive Chairman, Mr. Peng Chiun Ping.
The company’s shares remain significantly controlled by the family, principally through a Taiwan listed company, Action Electronics.
Since listing, the company has not succeeded in product or geographic diversification and it appears that the Company’s allocation for “R&D” has principally focused on the design and manufacturing of essentially similar products. Going forward, it is unclear where value creation is going to come from.
The Company is a 51% shareholder of ASD Electronics Limited, a Hong Kong company involved in sales and marketing of the Company’s products and incorporated in 2005. On the basis of disclosed payments to minority shareholders, in FYE 2009, 29% of net profit appears to be attributable to ASD (versus 52% in 2007). In the Company’s FYE 2005 accounts, the Company did not disclose why it is not a 100% shareholder of ASD and whether the 49% minority shareholders are connected parties.
Viability of the Business Model
The Company seems to have what it takes to survive in the narrow sense of producing a very limited range of commodity products at a volume and being able to retain key buyers. However, management has not demonstrated their ability to reduce the concentration risk of buyers by diversifying into other geographies and other products. No information is provided by management to indicate whether they have significant advantages in cost or scale vis-à-vis what are likely to be many existing and potential low-cost competitors.
The Company’s overall debt position is low and P&L margins appear to be healthy, although the negative operating cash flow, largely the result of working capital issues, raises concerns on the sustainability of margins. Management’s decision to reduce the dividend payout ratio may also reflect this concern.
Company’s Desire to Improve Value and Governance
There’s nothing in the published information by the company to indicate a strong desire for improvement in operations, ramp-up in valuation or improvements in governance. The latest accounts (dated March 1, 2010 and obtained from SGX website) have no discussion on strategy. The inter-related company holding structure is a potential risk for value-stripping.
The quality of disclosed management reports is poor, suggesting the possibility that management has lost interest in the listed company. There are 3 corporate governance “red flags” that investors should take note of:
- “Resolution 6”(due for vote at 21 April 2010 AGM) to change Auditors from Deloitte & Touche to PriceWaterhouseCoopers. Changes of auditors should always be viewed with suspicion
- "Resolution 7” (due for vote at 21 April 2010 AGM) empowering Directors excessive discretion in issuing new shares with no limitations on the discount. Both the amount of share issuance discretion (up to 50% with pre-emption) and the lack of limitations on the discount of shares are unacceptable. To add insult to this potential injury, management also seeks permission to issue up to 20% of shares (at any price) without pre-emption rights. Totally unacceptable. In the UK, pre-emption rights are only waived in respect of issues for cash which are a maximum of 5% of the company in any one year, with a 5% maximum discount to market price.
- Previous years’ annual reports are missing at both the Company website and at the SGX website. It’s pathetic that SGX would not have all annual reports available for download since the 2004 IPO. Likewise, the company’s Memorandum and Articles of Association are not available online for download (although a summary does appear in the prospectus).
The Company has not adequately disclosed the strategic rationale in only being a 51% shareholder of ASD Electronics Ltd., the Hong Kong based sales and marketing company, and whether the 49% shareholders are related parties.
Note: for more information on proper corporate governance regarding pre-emption rights, readers are encouraged to visit webb-site.com and in particular the following articles: Project Vampire and Status of Shareholder Rights in Hong Kong, both written by David Webb.
