Wednesday, March 3, 2010

Aztech Group -- Reasons for purchase

Warning: very long post below

Incorporated in 1986 and listed on the Main Board of the Singapore Stock Exchange, Aztech is now a dynamic international group with key activities in Electronics Design & Manufacturing, Materials Supply and Marine Logistics. The Group operates in six countries over three continents. In Sep 2009, Aztech suggested to diversify it's revenue source by expanding into property development with Aztech Property. Recently, Aztech Electronics launched a new subsidiary called Aztech E-lite Pte Ltd, focussing and leveraging on the strengths of the Electronics segment to branch into the LED market.

In the earlier post, I mentioned that I bought into Aztech Group at 0.23. In this post, I will delve into the reasons why I bought this stock very briefly.


For 22 years, Aztech's primary business segment has been the design & manufacture of data & voice communications electronics products for OEM/ODM, Contract Manufacturing and Retail Brand. In 2008, Aztech started its diversification plan with the inception of AZ United Pte Ltd for the supply of construction materials. AZ Marine Pte Ltd was also formed to provide the complementary marine logistics support, as well for external chartering of offshore vessels.

With headquarters in Singapore, Aztech has offices in United States, Germany, Malaysia, Hong Kong and China, supported by over 2,500 employees worldwide. Its vertically integrated manufacturing facility is located in Dong Guan, China, with 4 R&D centers in Singapore, Hong Kong, Shenzhen and Dong Guan.

Aztech's main expansion plans now are focussed on diversifying their income sources. In time to come, they will become another multi-industry company that will get bigger and stronger.

Basic Fundamental Analysis
Aztech has been consistently raising dividend payouts for the past 5 years.

Based on the last dividend payout, the payout ratio from profits was 44%. By buying into this stock, I can expect it's dividends to continue rising as the EPS is more than sufficient to cover the dividends payout.

The key data from the past 5 years from Aztech's presentation slides is as follows:

Overall, there's a trend of increase of NAV. The dip in NAV between 2008 and 2009 was due to a rights issue, 1 for 5, in 2009. This was not taken into account in their slides before the year 2008. At my purchase price of 23 cents, the PE ratio is 6.13, and the dividend yield is 7.61%, although 0.005 cents was a pre-rights dividend amount. Buying at NAV is acceptable for me, especially when I trust that Aztech's NAV will grow slowly over the years with their expansion plans.

Aztech Electronics is where Aztech begun. The primary focus is on modems, but they supply solutions to the customers as well through their contract manufacturing. With the Next Generation National Broadband Network rolling out in Singapore, Aztech Electronics will stand to benefit as infrastructure (like modems) will have to be upgraded to support the new fibre-optic network. My expectations is that a repeat performance of their ADSL deployment a decade ago is in the works.

AZ E-lite

Az e-lite is a new subsidiary of Az Electronics to expand beyond broadband and networking to capture a potentially huge market in LED lighting.

The comments from Michael Mun, CEO of Aztech, summarized the potential of Az e-lite:
“Due to continued rising electricity tariff, coupled with the dramatic improvement in LED’s in recent years in term of performance, quality, life span and eco-friendliness, we believe the market conditions are right for the LED replacement lamp market to accelerate in the next few years. Regulations in Europe (The Energy Information and Security Act of 2007) will ban the 100W incandescent lamps by 2012 and all incandescent lamps by 2016. By 2012, with a few exceptions, inefficient incandescent lamps cannot be sold. Market opportunities for LED replacement lamps will thus be created and we intent to capitalize on this. We believe LED lead application will present at least a 5 years market opportunity.”


These are 2 new subsidiaries started to diversify the revenue sources for Aztech. Az United is involved in the procurement and supply of materials for the building construction industry and infrastructure development projects. The successful and early completion of Phase Two contract ahead of schedule resulted in a sudden spike in revenue for 2Q2009 and 3Q2009, and then a decrease in the revenue for 4Q2009. i believe this is the first major contract for Az United right after it was established to be rolled out over 3 years, and Phase Three is to be completed in 2010.

Az United expanded to include Az Marine in 4Q2009 to branch into offshore vessel chartering business. Agressive expansion indeed. Moving forward, Aztech plans to further expand into the marine logistics business, and perhaps branch out further into offshore oil and gas sectors. As of now, Aztech Marine operates 11 tugboats, 8 barges, 1 crane barge and 1 support vessel, a total of 21 vessels.

Financial Statements
Debt level:
Currently, Aztech has a total of $49.4 mil of debt, of which about $30 mil needs to be repaid by this year. Given that Aztech's current cash position is $36.1 mil and profit before tax is $18 mil, the amount of debt wouldn't be hard to be repaid.

It is in my opinion that this is a good debt as Aztech was expanding aggressively from 2008 onwards with this debt. On hindsight, this is a brilliant move by the management as 2008 and 2009 were recessions, and traditionally, businesses that expanded during such recessions tend to emerge stronger, bigger and better. This is one main reason why I invested in this company, both for growth in share price and potential dividend yield.

Basically, this is a company to invest in for it's rather silent, yet aggressive and leveraged expansion by the shrewd management.

Some Basic Financials
At the price of 23 cents,
The ROA is 7.9% while the ROE is 13.7%. Revenue has been growing and Aztech has been positive for 28 consecutive quarters, or 7 years consecutive! This is testament to Aztech's resilience through the 2003 and 2009 downturn. Amazing, and with the recent expansions, it looks as if this trend will continue. Of course, history is not a good gauge to Aztech's survivability, but it sure looks good.

Basic Discounted Cash Flow Valuation:
Using an extremely conservative model (which means I assuming the revenue growth is at worst equal to the inflation value), I value Aztech's intrinsic value to be about 33 to 35 cents. At the current price of 23 cents, it is the NAV value and is at a 30% discount to my calculated intrinsic value. The margin of safety is sufficiently great.

In addition, Aztech is cum dividend of 1.25 cts per share, which will offer good support for its share price for quite a while.

Basic Technical Analysis
As for the technical analysis part, it's pretty much easier. Aztech appears to be in a symmetrical triangle, and currently very near it's 200MA and trendline support of 21.5 to 22 cents.

The symmetrical triangle is valid because of the declining volume. This symmetrical triangle is more bullish bias because the previous trend was a bull. With the bollinger band closing up, it appears that an imminent breakout (to either bullish or bearish) is coming soon... real soon...

Because of the 200MA and trendline support, in addition to the positive divergence seen on the MACD histogram, I'm more inclined to a bullish breakthrough for Aztech in the short run. %R is high, indicating strength in the uptrend. A definite break past 23.5 to 24 cents will result in a breakout, I believe. I had a chance to make Aztech close at 23.5 cents today to make the charts look nice, but I decided against it as I'm more for the longer term outlook for this company.

In short, good luck to me :)


The contents in this website are my thoughts reflections and describe my path towards my goal towards financial  freedom as I plod along. It is for your reading pleasure and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your decisions.


  1. Hi JW,

    Don't worry I am never afraid of long posts, in fact I love to digest information and to make inferences haha.

    1) How did you compute the intrinsic value of Aztech? Did you use a DCF analysis? What were your assumptions for the DCF?

    2) I note you said that Az's debt was "good debt" as it allows them to expand. What I want to say is that debt is debt, I won't classify it as "good" or "bad". It's how you use the debt and whether it can eventually generate high ROE.

    3) What are the net margins for LED and Construction business? I am quite confused over Az's recent moves. Why are they choosing to do something which is so different from electronics? Chartering vessels now? Hmm....

    4) You did mention the EPS can sustain the dividend payout in your post. But note that Earnings Per Share has nothing to do with dividends; thus it is Free Cash Flow which you should be lokking at. I note there was FCF for FY 2009 but it is better to plot a 5-year breakdown of this to assure yourself.

    5) Their borrowings seem very high in relation to their Cash Balance. Why does Az need so much debt, and why did they have a rights issue as well? Maybe it's better to analyze the cash burn rate instead of earnings increase? I personally think the 28 consecutive quarters of profitability is a marketing line. UTAC (now delisted) used to report XX consecutive years of revenue and profits too but ultimately still struggled to generate decent cash flows. I used to own UTAC back in 2006 before switching to value investing.

    6) NAV is not always a strong cushion to fall back on, so I suggest basing your purchase decision on PER instead, and also having an eye on the cash flow generation ability of the Company.

    Overall, I can sense your tone is one of optimism and also a little awe, from the words you use within your write-up (e.g. brilliant, shrewd, amazing). I always adopt a stance of being realistic rather than optimistic; even for my recent purchases like Kingsmen where I always tend to look for the downside rateher than assume good upside.


  2. Hi MW,

    you are right I might be a little too optimistic. :)
    But I have to say I'm amazed at their aggressiveness after 5 years of profit, and not doing any diversification until 2008, where everything is much cheaper!

    1) I used DCF as mentioned. The assumptions were mentioned as well, in that the revenue growth is at worst equal to the inflation value.

    2) To me, there's good debt and bad debt. Good debt is debt used for expansions, etc. Bad debt is debt used for purchases that will not lead to expansions... i.e. cover losses...

    Certain debt is necessary for a business to grow and expand at a sufficiently good rate. In addition, having some debt reduces the amount of tax to be paid right? Need you to confirm this...

    3) For LED business, it's still very new, hence no reports are out yet. However, being in the semicon industry myself, I can safely say that net margins for semi-con are generally very high. Something that costs perhaps 30 cents to make overall can sell for over 30 bucks... After all, sand, where silicon is extracted from, is cheap.

    Their recent moves are more for diversification. I'm a fan of diversification and multi-industries now, i.e. Keppel Corp and Sembcorp. In this sense, they will be less affected by the cyclical nature of the electronics market. The fact that they are profitable for the new subsidiaries shows to me that they are on the right path, and they mentioned that they are committed to make every business profitable.

    4) Agreed. Will check that up

    5) To me, the debt is used primarily for expanding. I will have to go into Part 2 for points 4 and 5. In summary, the debt is as follows:

    2006: 20 mil
    2007: 28 mil
    2008: 69 mil
    2009: 49 mil

    Aztech started it's expansion program in 2008, and the marine fleet they have is paid by both cash and debts. With their profits, they will be able to reduce this debt back to 20 mil soon.

    6) Again agreed. Thanks for the guidance.

  3. Hi owner of this blog.

    I'm very impressed by how much you save up every month. Just curious, does that include how much you give ur parents every month?


  4. Hi Heather,

    it does not include how much I gave my parents each month. But at the moment, but my parents are still young (early fifties), so there's no hefty medical bills or etc to worry about. They had been prudent in expenditures too, so there's no debt to worry about too.


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