Saturday, March 31, 2007

Regarding DuFu


Yes, dufu was featured by Asia Analytica. here is the link:

  • Dufu Technology Corp Bhd (RM0.76) is shaping out to be one of the market’s cheapest and overlooked stocks — ironically because it was listed on the wrong day — Feb 28, 2007, right when the recent global equities crash started. As a result, investors would have dumped their shares in panic, and the stock was further forgotten in the ensuing sell-off.
Born on the wrong day. Bad timing.. but is this really a justifiable reason to invest in the stock? You can trade and you can speculate but investing? That for me, it's a rather lame excuse to buy a stock by itself.

  • Dufu’s business model is similar to Notion VTec Bhd (RM0.595), which we have long liked. The company produces precision component parts for hard disk drives (HDDs), such as disk clamps and disk spacers (where it has an estimated 30% share of the global market), as well as non-HDD components for the telecom, industrial safety and sensor and consumer electronics sectors.
See? I do not understand this issue at all. If DuFu business model should be compared to Notion, then perhaps the investing public should ask a rather simple logical question. Which is better? DuFu or Notion? To suggest that there is a huge differential in pricing as an excuse to buy, is rather a no-no in my opinion.

Hey, it's just an opinion, hor.

So how good is Notion?

Notion current earnings is 27 million. Previous fiscal year it did 22.3 million. Indicating another solid fiscal years with storng earnings growth of around 22%. Net profit margins based on current earnings is extremely, very impressive at 27%.

Dufu? All one has is to refer to is a set of IPO proforma numbers. It did a 8.3 million in earnings with a net profit margin of only a mere 7.5%. ( see
Quarterly rpt on consolidated results for the financial period ended 31/12/2006 ). The managment projects an earnings of 11 million for current fiscal year. That's about a growth expectations of 32%, in case you are wondering. Well for a company with no proven listed track record, would you base ur investing based on management's projections?

Simple common sensing asking... if given a choice, based on these simple yardsticks, which would you go for? And if so, isn't it clear why the other one, Notion, trades at a much higher earnings multiple?

So why shouldn't DuFu trade at a higher earnings multiple?

How about asking why within the same business model industry, why isn't DuFu as profitable as Notion? Or why isn't DuFu earnings much higher? Remember Notion is earning around 27 mil and Dufu only 8.3 million (based on a current earnings). Why? Is there a gulf in class in how both business are managed?


Now let's look at what the article's reasonings..

  • Attractively priced at 6x P/E
    Due to its ill-timed debut, Dufu’s shares have fared badly. From an IPO (initial public offering) price of 70 sen, its shares rose to as high as 95.5 sen on its debut, but have since slid to 76 sen.

    Ironically, its IPO was already priced very low to start with — at 5.7 times 2007 earnings. By comparison, Notion’s IPO exercise in mid-2005 was priced at a forward P/E (price-earnings ratio) of 10.9 times — and its shares have since roughly doubled, including dividends. At 76 sen, Dufu’s shares are trading at just 6.2 times 2007 earnings — well below the market’s 17 times average. Incidentally, its valuations are roughly half of Notion VTec’s, which trades at 11 times financial year (FY) September 2007.
Priced very low during IPO.

However, shouldn't the analyst explain the simple fact that the 2007 earnings is based on management's earnings growth projection of 32%?

32 percent.

How many times have we not see ipo earnings projections that are missed by some 50% or more?

Ah, do not get me wrong, I am not judging DuFu's ability to perform but all I am asking is a simple what if thingee? What if DuFu's earnings projections is simply too optimistic?

Then, isn't the reasoning that DuFu is priced very low during its IPO, is perhaps not an accurate statement to make?


The writer than continues to describe Notion's awesome performance since listing in 2005. Look at Notion numbers.. tell me if their stellar performance in the market isn't justifiable? See

          Sales   Earnings margin
2005 79.288 18.643 23.51%
2006* 90.230 24.543 27.20%
ttm 100.541 27.172 27.03%

06 Q1 19.435 4.979 25.62%
06 Q2 20.316 5.535 27.24%
06 Q3 22.370 5.456 24.39%
06 Q4 28.109 8.573 30.50%
07 Q1 29.746 7.608 25.58%
Should DuFu trade at the same earnings multiple? Maybe but we have no data. 
And most of all, isn't it way too early to insinuate that? 
Why don't DuFu show us its ability first? Yes, let's see some track record first.

Wouldn't that be a more rational investing decision?
  • Although Dufu is smaller and less profitable than Notion (due to its higher proportion of lower-margin HDD components), we believe the valuation discount is far too large. HDD components comprise 86% of Dufu’s sales, compared with 55%-60% for Notion.
The writer than acknowledges the issue I have been rumbling on.

DuFu is simply smaller and less profitable than Notion.

That is a fact.

So would you accept Asia Analytica reason as stated below?

  • Dufu is diversifying its product range to improve margins. Asset valuations are also attractive. Dufu has 90 million shares issued and a market capitalisation of RM68.4 million. Its shares are trading at 1.2 times estimated end-2006 pro-forma NTA (net tangible assets) of RM56.1 million (or 62.3 sen per share).
    This suggests a small premium of just RM12.3 million for a 20-year-old company with secure multi-national relationships and Second Board listing status.

    We believe Dufu should conservatively trade at RM1.21, based on 10 times 2007 earnings. This is 10% below Notion’s P/E, and a steep 40% discount to the broader market’s valuation.
    If we apply Notion’s similar P/E, Dufu’s shares could trade to RM1.34. In any case, we believe Notion’s shares are still very undervalued at current levels.

I hope this set of second opinions helps and I have no idea how DuFu will trade in the near future.