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.