kcchongnz blog
A Tale of Two EMS Providers: SKP Resources versus V.S Industries kcchongnz
29/10/2017
SKP Resources (SKPR) was one of my stock pick in my “GE13 Stock Watch” when it was trading at 34 sen as published in i3investor about 5 years ago in the link below,
https://klse.i3investor.com/servlets/pfs/13147.jsp
I have also written a number of articles on V.S Industries about three years ago published in i3investor, specifically mentioning about its poor cash flows for a number of years.
The share price of VS Industry has risen a whopping 553% over the last three years to date. The rise of its share price was more pronounced from beginning of April 2016 when it was trading at RM1.18 and shot up to close at RM3.07 last Friday on 27th October 2017, giving a gain of whopping 160%, in less than one and a half year. The company market capitalisation grew to RM3764 million.
SKP Resources, however, rose only 141% during the same three years period. It closed at RM1.78 last Friday, giving the company a market capitalisation of RM2187 million. In fact, the share price of SKP Resources has gone nowhere the last two years until the last couple of months when its share price started to move up from RM1.30.
Which one has a better return in investment if you have bought them 3 years ago is clear in Figure 1 below showing the return of investment over three years ago for SKPRES (lower line) and V.S (upper line).
Figure 1: Price movement of V.S vs SKPRES for the last three years
Obviously, I was wrong in the subsequent share price performance of VS.
I was right on SKPR five years ago though, when its share price went up from 34 sen to close at RM1,78, for a total gain of about 400% over 5 years.
Did the business of V.S grew at much a higher rate than that of SKPRES over the last three years which warrants the big disparity of their share price movement?
The business
VS Industry Bhd and SKP Resources Bhd are two of the largest home-grown electronics manufacturing services (EMS) providers in Malaysia. Both the Johor-based companies serve some common customers. They are the two closest peers in their industry.
Today, VS Industry is one of the top 50 EMS corporations in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities, and hence is able to provide one-stop manufacturing solution to its clients. VS also has a more diversified customer base with three major clients, namely Keurig Green Mountain Inc (a US-based hot beverage system company), Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment) and Dyson UK. The three collectively contribute about 60% to the group’s turnover.
As for SKP Resources, it is one of the country’s fastest-growing integrated contract manufacturers, catering for the electrical and electronics, industrials, automotive and food and beverage industries. Its main customer is Dyson UK which contributes the bulk of its turnover.
SKP Resources’s in-house PCB assembly capability is coming in place now, rivalling that of VS. It also has better manufacturing capabilities.
Both companies delivered strong financial performance in the last three financial years.
But which company provides a better risk-reward ratio?
Growth
VS Industry’s revenue and net profit grew by a compounded annual growth rate (CAGR) 0f 24% and 43% to RM3281 million and RMRM156 million respectively for the last three years up to financial year ended 31st July 2017.
SKPRES’s revenue and net profit grew by much faster CAGR of 73% and 60% respectively over the last three years to RM2.148 billon and RM120 million respectively for the past 3 years as on 30th June 2017.
There are also strong visibilities in their future growth in revenue and earnings in the next few years. The high growth of Dyson especially in the China market is the common factor.
However, high growth is only beneficial to the company and its shareholders if the growth is a quality growth which enhances shareholders’ value, specifically the return of capital is higher than its cost.
Let’s first examine which, V.S or SKPR, is more efficient in their operations, and hence a better company.
Efficiency: DuPont Analysis
For efficiency, we will look at the return on assets (ROA) and return on equity (ROE), basing on their latest twelve months results ended June 2017 for SKPRES and July 2017 for V.S.
We will use Dupont Analysis to dissect their ROAs and ROEs to have a clearer picture on how their ROA and ROE were achieved.
Table 1 in the Appendix shows how the ROE of SKPRES was achieved versus that of V.S.
The table above shows that V.S has a higher turnover of RM3.28 billion, compared to the RM2.15 billion of SKPRES. SKPRES, however, has a higher net profit margin of 5.6%, compared to the 4.8% of V.S. V.S utilized three times total assets of RM2.9 billion to achieve the 53% higher revenue than SKPRES. SKPRES clearly has a much better asset turnover of 2.17, about twice that of V.S, and hence is much more efficient in assets utilization.
ROA = Net profit margin * total asset turnover
Generally, a ROA of more than 7% shows the management’s ability to manage its assets efficiently, and ROA of less than 5% is poor. Hence, we can say SKPRES which has a ROA of 12.1%, is very efficient in managing its assets, while V.S is just below average.
SKPRES has a healthier balance sheet with net cash of RM122 million compared to the net debt of RM362 millions of V.S. Consequently V.S has a higher financial leverage (FL) of 2.74 times, compared to the 1.92 times of SKPRES. Even with higher FL, ROE of V.S at 14.8%, is okay but inferior to that of 23.3% of SKPRES.
Generally, a company with ROE of more than 15%, has a good business, or more efficient.
ROE = ROA * financial leverage = Net profit margin * total asset turnover * financial leverage
The excellent ROE of SKPRES at 23.3%, or about twice its cost of equity was achieved both with a higher net profit margin and asset turnover, the more desirable ways to achieve a higher ROE, without undesirable high financial leverage.
With higher ROA and ROE for SKPRES, one would expect SKPRES would have been trading at higher valuation multiples than V.S.
But is it?
“Investment success doesn't come from “buying good things,” but rather from “buying things well.” Howard Marks.
Market valuations
On 17th October 2017, SKPRES and V.S closed at RM1.78 and RM3.07 respectively.
At those prices, SKPRES is trading at market valuations of PE of 18.3 and Enterprise 14.3 times Ebit, substantially lower than the 24.3 and 16.4 respectively of V.S, as shown in Table 2 in the Appendix.
This defies the logic that a better company in SKPRES should be traded at a higher market valuation. However, we know in investment, logic doesn’t apply all the time anywhere, especially in the short term.
“In the short term, market is a voting machine; but in the long-term, it is a weighting machine”
Conclusions
The DuPont Analysis of dissecting the ROE of SKPRES and V.S shows that SKPRES has a higher ROA and ROE of 12.1% and 23.3% respectively, which are much higher than that of V.S. Furthermore, the higher ROE of SKPRES was achieved with the more desirable mean, i.e. the high profit margin and asset turnover, coupled with low financial leverage.
It is a surprise that SKPRES is trading at a much lower market valuation than V.S.
Perhaps, for those who are interested in investing in EMS providers, this provides a good opportunity to accumulate some shares in a high growth company in SKPRES which are selling at cheaper price.
As Usual, for those who are keen to learn about fundamental value investing (FVI), or getting some stocks folowing FVI to invest in for building long-term wealth safely but surely, may contact me in the email address below.
KC Chong (ckc14invest@gmail.com)
Disclaimers:
All stocks mentioned here are for sharing about fundamental value investing. They are not recommendations to buy or sell.
There is no guarantee of the accuracy or validity of all information shared here, nor anybody is responsible for any errors or omissions which may have occurred.
Appendix
Table 1: DuPont analysis of SKPRES Vs V.S
Table 2: Market valuations of SKPRES and V.S
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Discussions
9 people like this. Showing 36 of 36 comments
Very good write up and analysis. Way better than someone who simply make things up by writing rubbish and called for a illogical price target of RM37 of a certain stock which he has vested interest on.
2017-10-29 20:17
Posted by VenFx > Oct 29, 2017 07:45 PM | Report Abuse
Hope kcchongnz may look into its EMS-vi peers eg. Uchitec / Pie / EG / Denko as the sector has more legs till 2020
Those mentioned above may have good potentials but I think none of the above has the visibility of high growth as those of VS and SKP Resources.
2017-10-30 07:50
Gd morning Kcchongnz,
In some extent i do agree your reply, wondering the I.P. and Tech. Know How are the same important ingredients as the Capex to decide their value. That explain why Vsi advance compared to others EMS-vi peers.
EG working hard for the capex & i.p., if course i know it still not your cup of tea given your strict FA parameters.
Thx for the reply kcchongnz.
2017-10-30 08:11
Thanks for sharing Kcchongnz
Love reading your articles,
Keep up the good work
2017-10-30 09:27
both are good.
The golden question is why mkt giving better valuation to VS?? Is it valid? Or SKPRES might play catch up?
The higher valuation for me make sense, because you as customer can get one stop solution from VS now, many things they settle for you, where SKPRES is still working on tht.
Imagine VS can be like FOXCONN, solution one stop for customer. even acquiring Sharp for LCD screen, thts the kind of strength needed.
Another point is technical know how. Do they have same level of technical exp? or is their engineer better than SKPRES etc, all these need to be answered.
VS serve various type customers, SKPRES majority one customer, few products only. So VS in a way more experience and has more know how on different products for me
2017-10-30 18:00
Good points.
However, Opinions are subjective. I prefer objective stuff like numbers like ROE, ROIC, growth rate, cash flow, health of balance sheet etc.
Anyone can say anything, and can have his own opinion. But numbers don't lie.
Posted by Hengyuan: SEXY BABE RM21! > Oct 30, 2017 06:00 PM | Report Abuse
both are good.
The golden question is why mkt giving better valuation to VS?? Is it valid? Or SKPRES might play catch up?
The higher valuation for me make sense, because you as customer can get one stop solution from VS now, many things they settle for you, where SKPRES is still working on tht.
Imagine VS can be like FOXCONN, solution one stop for customer. even acquiring Sharp for LCD screen, thts the kind of strength needed.
Another point is technical know how. Do they have same level of technical exp? or is their engineer better than SKPRES etc, all these need to be answered.
VS serve various type customers, SKPRES majority one customer, few products only. So VS in a way more experience and has more know how on different products for me
2017-10-30 22:37
Dyson contributes about 90% of SKPRES revenue. Malaysian market doesn't give very high PE for companies that rely on 1 big customer. The same reason why Magni's PE is low despite all the strong numbers and ratios.
2017-10-31 00:32
Just VSi is always ahead of the trend, it is always the leader and first mover into the higher chain .
Skpres more like a Funds manager who always stay cautious,
While, VSi is the explorer for it's empire in the region.
Vsi will always has the first taste for the juice, bit it the sweet or bitter one ... but, over time they gain from the process. Thats, power up their strenght as long they didnt hit by the Armageddon.
2017-10-31 01:16
The BIG factor to look at valuation for VS and SKP is Capacity Expansion which has been ignored by KC Chong by purely look at historical data.
2017-10-31 01:33
Nothing wrong,
That's the classic style ,
Always facts & figures 1st,
But, Ems-vi it's the earning capex counted.
2017-10-31 02:07
Well, no right and wrong truly enough, unless you expert in the industry, then u know each management weakness and strength.
Serving one big customer is high risk enough. Why? Even you provide excellent jobs, you are always in mercy of one giving you job coming years. Second, one tiny little screwup , can be a human error or perhaps just an accidental mistakes, bye bye to your biggest customer as they have tons of others queing to serve them. Same like investment, always put egg in few basket. Watching one egg in just one basket is just too risky. Even a genius calculated everything, there will be things beyond calculation always. So why not deversify?
2017-10-31 02:36
Investment is an art, it is always the things beyond numbers. If not, machine and artificial intelligent would have taken all analyst and fund mgrs job just by doing big data analytics. Oops, this becoming true anyway. Haha.
So who need analyst anyway???
2017-10-31 02:39
VS'S PRODUCT QUALITY ALWAYS BETTER THAN SKPRES AND OTHERS SUPPLIER, THATS WHY DYSON PREFER TO GIVING MORE CONTRACT TO VS INDUSTRY INSTEAD OF SKPRES. THIS ALSO BOOSTING VS AGGRESSIVELY EXPAND ITS BUSINESS AND PRODUCTION LINES RECENTLY.
I AM INSIDER OF VS AND I HAVE FEW FRIEND WHO WORK IN SKPRES TOO, I KNOW A LOT ABOUT THE INDUSTRY AND CURRENT SITUATION OF 2 COMPANY.
I AM NOT SAYING YOU ARE WRONG, BUT YOUR ANALYSIS PURELY BASED ON THE HISTORICAL FINANCIAL STATEMENT. INVESTMENT ARE LOOKING ABOUT THE FUTURE OF COMPANY.
2017-10-31 10:01
so is investment a maths problem to be solved? or is it about business and management?
is it about buying the best business / management or about the buying the second best ?
is is about buyer the cheaper option like in a pasar malam ?
is it homogenous product or about heterogenous product?
since every company is different , when KC treats it like it is a commodity / homogenous product, .......well...you will get the inferior product/ company.......comes with the way you approach investment.
2017-10-31 10:11
goreng_kaki VS'S PRODUCT QUALITY ALWAYS BETTER THAN SKPRES AND OTHERS SUPPLIER, THATS WHY DYSON PREFER TO GIVING MORE CONTRACT TO VS INDUSTRY INSTEAD OF SKPRES. THIS ALSO BOOSTING VS AGGRESSIVELY EXPAND ITS BUSINESS AND PRODUCTION LINES RECENTLY.
I AM INSIDER OF VS AND I HAVE FEW FRIEND WHO WORK IN SKPRES TOO, I KNOW A LOT ABOUT THE INDUSTRY AND CURRENT SITUATION OF 2 COMPANY.
I AM NOT SAYING YOU ARE WRONG, BUT YOUR ANALYSIS PURELY BASED ON THE HISTORICAL FINANCIAL STATEMENT. INVESTMENT ARE LOOKING ABOUT THE FUTURE OF COMPANY.
And may i ask u how do you identify if a company is good or trash, consistent or not consistent, possibility of giving good dividend in the future or not, high risk or low risk, discount or overvalue. There's only 1 way stripping out numbers in the annual report and tabling numbers.
Please stop talking about future. Talking about future is assuming and assumption bears risk cause u duno shit. Unless you are god.
Focus on things u can touch, feel, see, trust, wether u like the product or not is more important coupled with strong FA of the product produced by the company.
2017-10-31 11:23
Hi self-proclaimed accountant (I am increasingly and highly suspect you are an accountant as claimed by you).
Good points from you. Appended below are you comments with mine in CAPITAL LETTER.
Please enlighten us on my comments.
Posted by stockmanmy > Oct 31, 2017 10:11 AM | Report Abuse
so is investment a maths problem to be solved? or is it about business and management?
IN MY ARTICLE, I DISCUSS ABOUT THE PAST, PRESENT AND POTENTIAL FUTURE GROWTH OF THE COMPANY. I TALKED ABOUT HOW IT MAKES MONEY, FROM THE CAPITALS IT EMPLOYS. I DISCUSSED ABOUT HOW EFFICIENT IS ITS BUSINESS; MARGIN, ASSET TURNOVER, LEVERAGE IT EMPLOYS ETC. I ALSO TALKED ABOUT WHAT IS THE HEALTH OF ITS BALANCE SHEET, CASH FLOWS ETC.
FURTHERMORE, I DISCUSSED ABOUT ITS VALUATIONS IN RELATION TO ITS PEERS, USING ITS PRICE NOW.
AREN'T ALL THESE ABOUT THE BUSINESS, AND HOW ITS MANAGEMENT HAS PERFORMED?
I WOULD LIKE TO HEAR YOUR SIDE OF THE STORY, YOUR EVALUATION OF THE BUSINESSES OF BOTH THESE COMPANIES, AND THEIR MANAGEMENT. PLEASE!
is it about buying the best business / management or about the buying the second best ?
IN THE ARTICLE, MY POINTS OF VIEW ABOUT WHICH IS A BETTER BUSINESS IS HOW MUCH RETURN THE COMPANY GETS FROM THE CAPITAL EMPLOYED, CASH FLOWS, EARNINGS, AND WHICH BUSINESS IS CHEAPER WITH THE MARKET PRICES NOW.
SO HOW DO YOU DETERMINE WHICH BUSINESS IS "THE BEST"? WHICH MANAGEMENT IS "THE BEST"? PLEASE!
is is about buyer the cheaper option like in a pasar malam ?
WELL, IF YOU THINK BUYING A SIMILAR SHIRT AT RM1000 AT AN UPMARKET SHOPPING MALL IS BETTER THAN ONE AT RM10 AT THE PASAR MALAM IS BETTER, I CAN'T HELP YOU. AFTERALL, YOU CLAIMED TO BE AN "ACCOUNTANT".
is it homogenous product or about heterogenous product?
CATCH NO BALL OF WHAT YOU ARE TALKING ABOUT HERE? A HOMO PRODUCT?
since every company is different , when KC treats it like it is a commodity / homogenous product, .......well...you will get the inferior product/ company.......comes with the way you approach investment.
THESE TWO COMPANIES ARE CLOSE PEERS. IF YOU NOT HAPPY OF MY WAY OF COMPARING THEM, LETS HERE WHAT YOU SAY. PLEASE!
2017-10-31 14:24
kcchongnz is a successful investor, i always read his article. I support his point in comparison between VS and SKPRES
2017-10-31 15:46
A bit confusing on PE.
Can somebody explain, pls.
Malaysian market doesn't give very high PE for companies that rely on 1 big customer. The same reason why Magni's PE is low despite all the strong numbers and ratios.
2017-10-31 16:02
Dyson got lots of listed contractors in Malaysia but VS seems to always get all the best contracts.
This you would not know from his maths formulas.
But you will know if you got good intelligence and good research on the ground
2017-10-31 20:30
Posted by stockmanmy > Oct 31, 2017 08:30 PM | Report Abuse
Dyson got lots of listed contractors in Malaysia but VS seems to always get all the best contracts.
ME: WHERE ARE YOUR EVIDENCE ON YOUR STATEMENT ABOVE?
BEST CONTRACTS? HOW COME ITS NET PROFIT MARGIN IS 15% BELOW THAT OF SKPR WHICH I HAVE SHOWN YOU?
SO HOW DO YOU DEFINE "BEST"?
This you would not know from his maths formulas.
ME: THOSE NUMBERS WERE USED TO ANALYZE HOW GOOD A BUSINESS IS.
HOW CAN YOU CLAIM YOU ARE A "ACCOUNTANT" WHEN YOU CAN EVEN FATHOM SOME ACCOUNTING FOR BUSINESS?
But you will know if you got good intelligence and good research on the ground
ME: TELL ME WHAT YOUR "INTELLIGENCE", OR YOUR "GOOD RESEARCH" IS ALL ABOUT.
2017-10-31 22:07
Goreng kaki, don't mid to share a bit? Is it VSgoing to get even more new product type contract, while skpres just serving probably same product with additional capacity only.....?
From what I understand , VS is more capable from engineering point of views. I am no expert is EMS , need your opinions
2017-10-31 22:24
your maths formula cannot pakai,
its your attitude
you approach investment like a pasar malam
looking for the cheapest product...and getting the lowest quality product.
no wonder you cannot be super investor.
2017-11-01 00:11
Haiyo, manmy all nite ling trying to say mat tak boleh pakai...
Only x sense the only almighty formula ...
U need to proof that, come
Join me in EG, then kaboom and then claim the credit...
That , might stand a chance to convince sifu like kcchongnz.
EGgsy welcome manmy, come come ...dint wait too long
EGG gang with Epf now... next i don't know what ekse to kaboom,
Check the 2 horsey i picked to challenge with u COMel & Vis...
Kaboom nonstop...
2017-11-01 00:33
ven...google investments and physics envy.....
kc suffers from physics envy, a disease many have written about.
2017-11-01 00:37
So, u dint want to hop in my tut tut ?
Like u look down my jingheng monyet ?
Kikiki
2017-11-01 00:41
If u hv the Almighty One formula, u should hoo on my tut tut ...
Come come, EGgsy got all the horsey u need
2017-11-01 00:44
ven
Comintel sold their EMS business because it is a tough business. The Malay partners want out.
You survive and trive only if you are the best of the best....such as VS and Vitrox.
2017-11-01 01:23
I purposely cjoose Comel & vis as my horsey ma, but u mot take my challenge lo.
2017-11-01 01:56
Posted by stockmanmy > Nov 1, 2017 12:11 AM | Report Abuse
your maths formula cannot pakai,
its your attitude
you approach investment like a pasar malam
looking for the cheapest product...and getting the lowest quality product.
no wonder you cannot be super investor.
Posted by godhand > Oct 31, 2017 11:23 AM | Report Abuse
And may i ask u how do you identify if a company is good or trash, consistent or not consistent, possibility of giving good dividend in the future or not, high risk or low risk, discount or overvalue. There's only 1 way stripping out numbers in the annual report and tabling numbers.
Please stop talking about future. Talking about future is assuming and assumption bears risk cause u duno shit. Unless you are god.
Focus on things u can touch, feel, see, trust, wether u like the product or not is more important coupled with strong FA of the product produced by the company.
2017-11-01 18:09
Bitcoin was already trading at a highly inflated rate in the troubled African country as its demand skyrocketed as a potential alternative to the dregs of a currency that Zimbabwe has left. However, that inflation has hit almost 100 percent as it trades about $13,000 per coin.
2017-11-10 14:47
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VenFx
Hope kcchongnz may look into its EMS-vi peers eg. Uchitec / Pie / EG / Denko as the sector has more legs till 2020
2017-10-29 19:45