創科Techtronic (669.HK)

0669.HK（創科實業 Techtronic） is getting very interesting at current price at $1.61, at only 3.5x '08 EV/EBITDA. Share price tanked 11.5% today (Dec 29, 2008) for no apparent reason. There are several factors going in favor of Techtronic:

1) 3.5x '08 EV/EBITDA, and with moderate EBITDA growth '08-'09, is very reasonable by any measure for a branded power tools manufacturer like Techtronic… its closest comp, Black & Decker (listed in US), is trading at 7x '08 EV/EBITDA, and Black & Decker's EBITDA is expected to fall '08-'09

2) 0669.HK（創科實業 Techtronic)'s Chairman has kept buying throughout the drop, and even at the $6-8 level. He recently bough 55 million shares from the Vice-Chairman of the company in the off-market for $2, as the Vice-Chairman (who was a co-founder of Techtronic along with the Chairman) wanted to retire. If you buy at current price, you'll be buying at a 20% discount to the Chairman's last significant insider transaction. The Chairman knows the company most intimately, so while one cannot quantify this factor much more, because you know it's a good thing.

3) Techtronic is rolling over + repaying its debt. Its high indebtedness is a key concern for the market. Its strong operating cashflow (which is very strong) will likely cover most of the debt payments, while for the rest, the company has either successfully rolled over or is close to it.

4) Techtronic's raw material costs (e.g. steel, plastics) are falling alongside the collapse in commodity prices. So that's very positive for the company's operating margins.

5) Techtronic is close to completing its business portfolio restructuring (it made some acquisitions not long ago), so there are less uncertainities ahead, and there could even be synergies to be realized.

6) Analysts are expecting Black & Decker's sales to be down 10% '08-'09, while Techtronic's to edge up slightly. So the sales slump may not be as bad as people have anticipated / market has priced in.

7) Governments around the world (e.g. China, US) are boosting infrastructuring spendings to cushion the economic downturn, and India and Middle East will continue building roads, bridges, ports, housing, etc. because they start from a low base. This is all positive for a power tools manufacturer like Techtronic.

8) Techtronic used to be a darling to many fund managers including Value Partners but by now I would think that they have probably dumped most, if not all, of their positions, and hence clearing up the overhang, and paving way for share price recovery eventually.

So overall, I think the investment is a worthwhile one. The point is to have enough staying power in your position to hold it until the next bull market. It could very well drop to $1.20, who knows. But in 3-5 years, this one looks pretty good. Or if you are more of a short-term, risk-taking flipper, you can refer to late-Oct'08 when share price fell to $1.25 (as Vice Chairman was selling at the open market *which I think is why the Chairman has to bail his ass out*… well, to be fair, some funds may be selling as well), and the next day, share price more than doubled. So the point is that it has happened before, that this stock can double in a day at this depressed price. But that wouldn't be my base case, and shouldn't be yours either.

Recent Oil Prices

It may be a good idea to start looking for stocks of companies which would benefit from lower oil prices, and yet the market has not realized / priced in already.

Just thinking out loud - one such pick may be Transport International (62.HK), the parentco of KMB. Reasons why I like the company are 1) monopoly, 2) not affected by economic downturn, 3) have recently raised bus fare, 4) oil is a major cost and oil price has come down significantly. The bus business is a very low margin one (i.e. mid single-digit net margin), so you get a big bang on the buck when bus fare is raised, say 5%, as most of that would flow that to bottomline; the effect net of tax could easily lead to a 50-70% increase in net margin. And more even so for oil price which has come down 70% from its peak. If it stays at similar level, it will have a huge positive effect on the company's bottomline. The extent of the effect of bus fare raise and oil drop on the bottomline will need to be quantified for those of you who are serious about doing some homework for this company, as I have only laid out the qualitative factors in play here. One thing to look out for is that the company has sold all of its Manhattan residential projects so when you look at the annual report for 2007, you should net out the property effect, and judge the company as a bus-only going concern, though a latent value for this company is its ability/optionality to convert of some its land that is now used for bus parking for property development.

Along that "oil drop, not priced in by market" theme, there are already the toy manufacturers who's main raw materials are plastics, whose price is closely linked to oil prices. But then, for those guys, the problem is US/EU demand. So while their margin could improve, their revenue could decline 30%, and the net effect on the bottomline could be minimal, and the earnings could still look pretty bad. You may also look at small industrial companies that David Webb loves, like Karrie International (1050.HK) who were killed by higher raw material prices, labor cost inflation in China, RMB appreciation (as their costs are mostly in RMB, while revenue in USD and report results in HKD). The problem is again US/EU demand, but there may be some of these guys that will ride out this crisis, and manage to maintain their revenue at rough the same level, and are priced at 3x '08 EV/EBITDA, with healthy debt/cash profiles. Those (if they exist) would be attractive buys.

You'll see that out of my four stock picks in my previous column, Regal REIT (1881.HK) and QJY Media (2366.HK) already started to move up.

Problem with Sinomedia (623.HK) is low trading liquidity, and the strategy may be to put in a low-ball bid everyday (e.g. $0.75) and see if it ever hits. This one will take some time for trading liquidity to come back, and I believe that, along with their next result announcement, will be catalysts for the stock.

Techtronic (669.HK) is still a risk bet. One favorable development in the past week is the Fed cutting rates to almost zero, as this company has high indebtedness. I would recommend this stock only to those who have a 5-year investment horizon (i.e. can see the stock priced correctly in the middle of the next bull market).