Saturday, February 28, 2009


A brief look at Venture, as its already well covered by analysts. Cheap at 7-9 times projected 09 earnings.

Approx 275m shares issued, plus 2.5m unissued shares under options scheme. Mkt cap @$5 is approx $1.39bn

1) What do they do?

Contract manufacturing in these areas (from 07AR):
2) Competitive Advantage (market share)

Venture's largest competitors:

Latest Revenue
(Year ending Mar 08) U$26.7bn
Makes everything: phones, laptops, cameras, telecoms infrastructure, office equipment, networking.
Quarter ending Dec 08: Q-on-Q sales down 10% (9bn to 8.1bn), Earnings (excl. one-time) down 49% (249m to 126m).
Hon Hai Group (unlisted). Group which includes some listed companies - largest is Hon Hai Precision (HHP).
HHP alone:

Estimate U$54bn for 1 year from here.

NT 92bn (in Jan 09 alone).

See table for others.
Worlds largest CM by revenue.

Makes everything. Also cool things like iPhone, kindle, Wii.
For Jan 09 (one mnth):
  • HHP down 12% YOY.
  • Foxconn (makes wii) up 20%.
  • Other smaller ones down 30-50% - See table.
Quanta Computer
(Unaudited) From here: NT790bn in 2008, or U$22.6bn
Worlds largest notebook maker: estimated 33% mkt share in 05.

Makes consumer products: Notebook, smartphone, automobile GPS/TV, digital TVs.
Monthly sales are updated here (unaudited). January's sales down 36% YOY.
USD 700m in 2008 (p40 here) - how can it be so low?
In early 2008, sold their PC business (1/3 of revenue, approx 3bn) to Foxconn (Hon Hai). Dunno what they do now.
Dec Quarter revenue down 20% YOY.

USD 7.7bn in 2008 (slide 6 here).
30% consumer, 20% enterprise, see slide 4 here.
Dec Quarter down 12% YOY.
USD 2.4bn in 2008
See 1) above.
Dec Quarter up 6% YOY

An old (2004) listing of the worlds largest Contract manufacturers is here. Since then, Solectron was bought by Flextronics, and Sanmina-SCI's PC division was sold to Hon Hai.

How have they fared in the latest quarter:
All have been hit by the slowdown, with sales down 12-40%. Venture was hit less because printing and RSS managed to sign up new customers: (From DBS report, 20-Feb-09) - look at the 3rd column:

  • Venture is a small small player, compared to the other giants. 10 or 20 times smaller (by revenue) than Hon Hai and Flextronics.
  • Most contract manufacturer's revenue fell 12-40% in 4Q. Venture had a smaller fall due to signing up new customers (growth seems to be related to retail - which is the main use of thermal printers), but we should probably expect a fall later. Analysts are guiding for a 25-35% revenue fall in FY09 which seems realistic looking at the numbers above.
3) Business Model

Their FY08 earnings statement in 5 lines:

Revenue: 3.8bn
Raw materials and consumables: 3.0bn

Staff costs: 290m All other costs incl.
depreciation: 510m


PBT 172m

Low margin, high turnover business.
Asset light:
  • Depreciation was only 60m (included 17m amortization of 'customer relationships' so this would give 43m 'real' depreciation).
  • Operating leases in FY07 had minimum payments of 13m.
Therefore, their free cash flows mostly dependent on management of working capital.

4) Valuations:

PE is really low, reminds me of the 01/02 bear market. Only question is how much earnings can drop:
  • DBS estimates 23% revenue fall for 09, earnings forecast of $183m. At a price of $5, gives PE of 7.6.
  • Macquarie estimates 35% fall in earnings for 09 to $155m, with 50c dividend (75% payout ratio). At a price of $5, gives PE of 8.9.
  • DMG forecasts 24.4% reduction in earnings to $217m. At a price of $5, gives PE of 6.4
5) Conclusion:

I like it because it it cheap - a blue chip trading at projected 7-9X earnings and 10% yield. Company is well run and should recover.

Risks are:
  • Competitors: it is far smaller than them.
  • May be a long time before the American consumer/economy recovers.

1 comment:

Anonymous said...

I don't think a contract manufacturer has any pricing power. They compete based on price. That's why the low margin. If I were to analyze, it will be on their cost structure and the ability to control that, against their competitors.