Monday, October 29, 2012

Hopefully, It Deswell!

The following is a guest post written by Phil Kazmaier, who has written for this site before:

Deswell Industries (DSWL) owns and operates a factory overseas specializing in production of plastic molded components (such as the casing your remote control) and precision electronics (like the sweet surround sound system your remote control operates).

The company recently suffered from the often fatal disease known as customer concentration as evidenced by the fact that in year ending March 2011 major customers (with >10% sales) accounted for 42% of total company sales. However I say "recently suffered" because during fiscal 2011 they went through invasive surgery to remove the disease, as their sales to major customers in year ending March 2012 fell to only 12%. (And all the small cap growth investors said "OUCH"). The question we must answer is, will the patient survive?

Fortunately for Deswell, they carry no debt and 44M in cash reserves and short-term investments against a market cap of......only 44M? On top of that, they have managed to generate 20M in FCF over the past 3 years despite the Felix Baumgartner-like drop their sales have taken. Lastly, none of this analysis accounts for land that they leased with an up-front payment from the government of China for 50 years (expiring in 2050), the benefits of which you can get for free at the current price.

Before getting too excited about this company, let's check the incentives. There we see that the chairman of the board owns 5.2M worth of the company, another board member (and ex-CFO) owns 4.7M, and the new president owns 550K worth of stock (all at current prices). Seems like the kind of setup where management wants to drive value for the poor small cap shareholder.

Time for the cherry on top: the company also pays a 7.3% dividend. But before you get too excited, this is a Chinese company and therefore each investor will need to decide if something that seems too good to be true actually is.

Happy hunting!

Disclosure: Author of the article is long shares of DSWL

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Anonymous said...

This is a Chinese company, yes. HOWEVER, it is not a "reverse merger".

I have been following it since the late 90's. They have consistently paid a dividend, for years & years. Management will admit to earnings & sales being down. They don't have any debt. They have large well known international customers. The business model is simple, and simple to understand.

I would place the odds of this being a scam at well under 1%.

Anonymous said...

Michael Burry (of Big Short fame) invested in DSWL in the late 1990s / early 2000. I think you can still find some of his old posts about DSWL on Silicon Investor.