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SmartMoney.com
This Chinese Manufacturer Is Red Hot
Monday December 1, 10:24 am ET
By Jack Hough
This article was originally published on SmartMoney Select on 11/20/03.
AMERICAN TEXTILE MAKERS say their markets are flooded with more cheap
brassieres than a Vegas stage after a Tom Jones concert. *g*(We're paraphrasing
here.) China is the culprit, and the U.S. has imposed a quota on certain Chinese
textile imports, which President Bush now says he's reviewing.
Lingerie isn't the only thing flying
out of China right now. The
country has made great strides in
consumer electronics, long
dominated by Japan and Korea.
The company we're looking at
today, Hong Kong-based Nam
Tai Electronics (NYSE:NTE -
News), is posting impressive
growth in its sales of electronic
gadgetry like screens and
transformers to manufacturers of
cell phones and other devices.
Nam Tai comes to us via our
Accelerating Sales Growth
Screen. Regular readers know we're big fans of sales-based value screens. But
sales are just as useful for identifying growth stocks. Sudden business
expansions tend to show up in strong revenue growth long before margins are
perfected and earnings maximized.
Companies typically experience their strongest growth rates when they're young,
and slow as they mature and saturate their markets. But many things can cause
a company's revenue growth rates to pick up even when it's getting on in years
— successful marketing campaigns and economic recoveries, among them.
Whatever the reason, companies that are increasing sales faster now than they
have in recent years show that something has gone dramatically right — and are
thus worth a look. We recently searched our 8,300-company database for just
such names.
Using our stock-screening tool, we looked for three-year sales growth of more
than 15% per year — well faster than the S&P 500's median of 6.6% — and
one-year sales growth higher than the three-year average. And to make sure the
results were ringing through as profits, we looked for 2004 earnings estimates
that had been boosted within the past four weeks. Institutions had to own at least
a 5% taste of each stock, but less than 60%. And analysts' recommendations,
on average, had to be Buy or Strong Buy for each company, the kind of
popularity befitting a growth stock.
We made other demands; they're listed on the recipe to the right. Our search
turned up 12 names, including Nam Tai.
We recognize, by the way, that some American investors won't be too keen on a
Chinese stock right now. Aside from the fact that securities laws are relatively
relaxed in China, there may be objections out there over the country's
human-rights record, protectionist currency pegging or the fact that the Chinese
government winks and nods at citizens who pirate our intellectual goods while
we buy their manufactured ones. Valid objections all, but it's our policy to stick to
the business prospects. You'll have to make your own social judgments, just like
with our past write-ups of tobacco-sellers, weapons makers and pawn-shop
operators.
In the past 12 months, Nam Tai has sold $236 million worth of electronic
components to most of the biggies: Sony (NYSE:SNE - News), Ericsson
(NASDAQ:ERICY - News), Toshiba (TOSBF), Hitachi (NYSE:HIT - News) and
Texas Instruments (NYSE:TI - News), to name a few. The company has
transformed itself over the past five years from a maker of less complex devices
like calculators and hand-held dictionaries to one of fancier gear like the color
LCD screens on newer cell phones and camera add-ons for Sony's
Playstation2.
The company's sales growth rate — 16% annually over the last three years —
has suddenly quadrupled. For its third quarter, reported Oct. 24, Nam Tai
posted $93.1 million in revenues, up 64% year-over-year. Income from
operations rose 198% to $9.9 million, or 26 cents a share, meeting the analyst
consensus. Most of the strong results were attributed to cell phones.
Even more promising was management's decision about what to do with all the
new money. In addition to the stock's regular quarterly dividend of a nickel,
shareholders as of Nov. 7 got a special 80-cent dividend and a one-share stock
dividend for each 10 they own. Even without the special payments, Nam Tai has
increased its dividend in each of the past 10 years.
Several indicators point toward continued success for the company. In addition
to components for exported cell phones, Nam Tai also does much of its
business in China itself. The country is the world's largest cell-phone market with
125.7 million users, and is also home to more than two billion of the world's 12
billion ears, giving it a cell-phone penetration rate of around 11%. According to
Jason Diamond, a research analyst with San Diego-based CapStone
Investments, usage in China should increase by 20% to 30% annually over the
next four years.
The trend toward subcontracting also bodes well for Nam Tai. "[Original
equipment manufacturers] have increasingly looked to outsource their electronic
manufacturing services functions to third parties in order to focus on their core
competencies due to fierce competition in the industry," wrote Diamond in a
Nov. 13 research note. "Demand for electronic manufacturing by OEMs is
expected to rise from $92.0 billion in 2002 to $170.1 billion in 2006. As a result,
many firms have looked toward China to meet this outsourcing demand."
(Diamond doesn't own shares of Nam Tai; CapStone doesn't have an
investment-banking relationship with the company.)
Nam Tai is working to ramp up production. Management's goal is to boost color
LCD module capacity by 65% to 2.6 million units per month in coming months,
and the company has already increased production of EyeToy USB cameras for
the PlayStation2 to 750,000 units per month from 50,000 earlier in the year. In
all, the company says it will spend $100 million over the next three years to
quadruple production.
Note, too, that the company's tax rate stands at 7.5%. Managers say by
reinvesting profits into the company in coming years, they can reduce this to
nearly zero.
Nam Tai trades at 35 times Reuters Research's three-analyst consensus of 98
cents a share in 2003 earnings, dearer than the electronics components
industry's average P/E of 20. But Nam Tai is projected to increase earnings by
28.0% annually over the next five years, more than double the group's 12.7%.
That makes for a price/earnings-growth ratio of 1.25. Compared with peers' 1.6
or the S&P 500's 1.7, that's cheaper than a Chinese bra.
yahoo.smartmoney.com/stockscreen/...y=20031120screen&afl=yahoo target="_new" rel="nofollow">Stocks: Stock Screen: The SmartMoney.com Accelerating-Sales-Growth Screen * Data as of Nov. 19, 2003
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