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Company Visit

By Paul A. Renaud.  January 29 ‘10  (First published for members on Jan. 13 '10)     

Hana is one of South East Asia's leading independent "Electronic Manufacturing Service" (EMS) producers. It’s a high quality leader in the region, yet trading at a fraction of what other such quality electronic firms trade for in the Asian region.

 A global leader in what it does, with huge amounts of cash on hand besides no debt.  HANA remains a key quality choice of mine going into year 2010.  Below is the in person tete-a-tete visit report I had in early January, with Mr HAN, the companies' CEO.

One of the last "buy views" in 2009 was HANA at the time at 19 Bahtg per share, and after visiting with this company’s executive Vice Chairman and CEO for 2 hours, I today re-affirm this upbeat view -despite its stock price already having risen from 19 when I first brought HANA to our members attention on December 11.

Here are the key points from my in person visit with Hana in early January, and as was reported to membes on January 13 '10.

--The outlook for the 4th Quarter and into this year remains strong, the cash on hand level is now around 5.7 Billion Baht or over 180 million US$ and the company has no long term debt. No global company in this business comes close to such a relative strong balance sheet along with an over 6% dividend yield!

-- HANA has never had a quarterly loss in its history since being a listed company starting in February 1993. CLSA, a large investment bank, rates HANA as the 3rd best in corporate governance Thai company listed on the SET. (Ex banks).

-- HANA bought back 3.08% of its shares earlier this year around an average market price of 10.80 Baht, per share, or some 25.6 mill. shares. These shares will be canceled and so not re-issued (!), hence the total outstanding shares will be reduced by 3.08%. Hence there is no market overhang of this (called treasury) stock.

--While the 1st Quarter ’10 just started, it looks just now to continue to be strong, spilling over after a surprising strong Christmas season.  Evidently global consumers opted to buy more smaller priced electronic products/gadgets, so opting out on the more expensive gifts this year. This trend benefited HANA and the electronic industry in general.

-- There are some 1.1 to 1.2 billion new mobile phones sold every year of which HANA is a major component supplier (new touch pads etc..). As the phone networks expand worldwide mobile phones are taking over more and more functions.  (Almost a quarter of US household for example no longer use landlines/fixed phones and many emerging countries bypass landline phones all together). It so remains a growth business!

---HANA is a very diversified company in its industry. While few leaders like HANA are listed on the SET/MAI, the industry remains in the top 5 in Thailand as far as employment of people. The difficulty last year allowed the company to do lots of restructuring and re-engineering. Getting rid of excesses, for example no more automatic bonuses. The company makes many of its own machines and moved more into automation last year.

---On a global scale, HANA is a mid size player with specialization in certain key smaller growth niches. Some of their global customers are Texas Instruments, Maxim, Fairchield, HP, and indirectly Apple computer and more.  Mr. Han explained that in his best estimate no more then 35% of total revenues come from the US, directly or indirectly.

-- Outsourcing is their preferred method but being diverse is the key in this industry, a direction the company has long pursued. The company has 2 manufacturing plants in Thailand and 1, (35,000 meters) in China. Many of its clients ask for manufacturing in Thailand due to better protection of intellectual property.  The company has close to 10,000 employees.

-- Lower consumer prices, better designs, ever better functions besides batteries and the networks they connect to, is what is driving the retail industry which is as ever before in love with such gadgets. Retailers were slow to catch on in late 2009 of which they are now catching up to. For Apple as one example, HANA makes the controller device to NANO and more. New ear hearing high tech devices are coming-out for the aging baby boomers, estimated in the hundreds of millions as its a global phenomena. Such devices can be inserted right in the ear canal, so is invisible besides of better hearing amplification quality. Ever better batteries needed though remains a challenge.

--- HANA is a flexible/fast manufacturer with a strong reputation on quality and on-time delivery. Raw materials represent about 65% of manufacturing costs. The company has no more temporary workers, as it decided to now hire them back on full time permanent basis. Employee training along with "fun tests" for extra money on their knowledge, keeps HANA having an above average workforce.

--- The company enjoys for long a low tax rate of around only 11%, yes this is likely to continue. The reason is that they have a very knowledgeable/able BOI tax privilege seeking department. Rolling over machinery and new projects allows them to keep-up with special Thai BOI privileges and so the low tax rates are likely to be maintained into the foreseeable future.

-- The company would be a bit vulnerable to a stronger Baht currency, if this takes hold. As most all of its revenues come from outside of Thailand. While the company hedges some of its currency risk, there is no question that a stronger Baht would dent profit margins some -while a weaker Baht would fatten them. I like this element in HANA as it insures investors from any profit drop should the Baht weaken due to politics, or the other all too well known uncertainty. A weaker Baht currency would be good for HANA and visa versa.

-- The company makes LED lights for Philips and even has some defense contracts in the bidding. What stands out with HANA, besides its very strong financial status and superior dividend yield, is the broadness of its product range besides global clients.

-- The challenges moving forward are organic growth and maintaining profit margins and transitions in ever new profitable business opportunity seeking. While revenues are on the increase the net profit margin has been lower from years past, this due to global trends experienced by all such industry related firms. Yet, for last year the net profit margin (9months) is shown at 14.12% vs. a bit over 12% for 2008. 

--The company has some 2500 shareholders and the family founders own about 35%.  The company has a stated dividend policy of 55% of profits and so is one of (if not the) the highest dividend yielder in its industry, compared to similar larger companies around the region or anywhwere.

Conclusion and my own earnings projections:

My own view, after a better understanding and reviewing other broker reports is that HANA can earn 2.20 per share last year (2009) and this increasing to 2.45 this year.  If the global economic recovery is entrenched, as I believe, the earning could easily increase to some 2.80 per share in 2011. 

I so guestimate the dividend to be around 1.28 for last year, or representing a 6.4% yield on the current market price of 21. The dividend per share should increase to 1.35 for this year, payable early next year, and so the indicated yield for 2010 should be around 6.3%, well above the SET average. The stock so now trades with a p/e of barely 10, or the lowest of any such quality firms in this region! Or anywhwere.

One of the key attractive features with the quality choice HANA is being a leader in the global electronics sector which historically does well early in an economic recovery cycle, the high dividend yield besides superbly strong balance sheet -not to mention its great corporate governance rating and reputation. 

And not least HANA being a global export company which would actually benefit from a weaker Baht, should this occur this year; due to the known political and other uncertainty. I so remains a top choice at this moment and going into 2010. HANA as a market cap of slightly over 500 mill. US$ and their web site is:  http://www.hanagroup.com/

Despite the near 12% price rise to 21 since my first table pounding here a month ago, I still much like HANA and rate it with a medium term buy view at current levels.  

Of course, always diversify with other choices. I have reviewed for members several others wich I view similar in quality and investor merrit.  

If you are considering a membership which should be viewed as an investment please write me a short e-mail to paulren@thaistocks.com with a shortest introduction.

Best Regards,

Paul A. Renaud.