NTE - Nam Tai Electronics

[DTEJD1997]

Hey all:

 

Good to finally be on this board.

 

Does anyone have any opinion/insight into Nam Tai (NTE)?

 

NTE is a contract manufacturer in China.  They manufacture all sorts of electronic gizmos.  They appear to be an interesting bargain.

 

Virtually no debt, close to $5/share in cash, earnings of about $1.50/share, EV/EBIDTA ratio of about 4.  DIVIDEND yield of about 4.5%

 

Certainly very cheap on those financial metrics...

 

HOWEVER, there are a couple of interesting kickers.

 

A). They are involved with work that has Apple as the final customer.  At present, they are working on displays for iPads & iPhones.  They only have significant revenue from this for the past two quarters.  In the upcoming 2 quarters, sales & earnings will be going up tremendously on a YOY basis.

 

B). Management has stated that at full capacity, sales will be about $900MM per quarter.

 

C). They have factory in Shenzen that has to be moved.  The Chinese government has rezoned the land, and it is going to be extremely valuable commercial land, not industrial.  This parcel of land is valuable, no doubt.  The question is how much this land is worth.  Some people are putting that figure in the HUNDREDS of millions.  There is a potential that this land's value will equal the market cap of the company (or come close).

 

D). If management is correct about sales volume, the stock could easily be NETTING $3/share, perhaps significantly more...

 

I've been in this stock for a long time and have done very well.  I think it has a good potential in the upcoming year.

 

Any body have any thoughts/insights?

[17thstcapital]

I own it but its definitely a speculative position for me (~3%).  Not because I think its a fraud (I don't) but because the business is very difficult to model given disclosure.  That being said, $3/sh EPS is very much doable making the stock dirt cheap even without adjusting for the cash and whatever the real estate is worth (which could be a lot).

 

Will this stock rerate anytime soon to reflect the earnings power?  Perhaps but my confidence level is not so high and this one might stay cheap for longer than it should given that its a Chinese company and all the noise surrounding Apple these days.  But the good news is that you get paid a decent dividend in the meantime and option vol is relatively high and you can put on some fun option trades as well while you wait.

[DTEJD1997]

Yes, I forgot to mention the premiums that options are bringing.

 

I will DEFINITELY be doing some option work on it if it spikes up and premiums are still thick & juicy...

 

Yes, you are also right that it will probably trade at a discount because:

 

A). It is a difficult business

B). It is a Chinese company

C). It is involved with Apple

D). It is a "small" cap company

 

HOWEVER, I can remember when anything associated with Apple traded for a premium.  I can also recall anything Chinese being the "next big thing".

 

NTE financial metrics are also heads & shoulders above most of the other electronics manufacturers.

 

If NTE can start pulling in $3-$4/share in NET earnings, and do that for over a year, the stock will be rated higher.  I can't really see it trading for a 3X P/E...

 

But that is truly one of my nightmares...I wake up in a cold sweat...NTE is making $4/share in net earnings, and the market rewards it by trading it at 4x P/E!  For a long time, NTE traded for BELOW their cash holdings!  The market can get goofy & stay goofy for a long time...

[mankap]

I own this stock for some time but it is not a big %age of my portfolio.

Apart from the positives that you mentioned there are some others too

Peter Kellogg has a big holding in NTE

Insider holding is too.

NTE has a history of paying big %age of FCF as dividend.

 

The risk for me is that 80% of their sales come from Sharp and Japan Display.

NTE is too dependent on the big buyers.We know that Sharp is going through tough phase and is in tough spot to rollover debt.

I would like to know what kind of leverage NTE has over these two buyers.

[17thstcapital]

The risk for me is that 80% of their sales come from Sharp and Japan Display.

NTE is too dependent on the big buyers.We know that Sharp is going through tough phase and is in tough spot to rollover debt.

 

Concentration is a big risk for sure but Sharp solvency is a bit overblown.  Sharp may or may not go bankrupt but its not going to liquidate and go away.  And if you buy that argument, then you can argue that NTE's business should not be impacted by Sharp's debt issues.  Let's see what happens.

[mankap]

I am not worried about sharp's solvency in the near future.The point I am trying to make is that having two buyers account for 80% of your sales is a risk that I cannot ignore.

It gives too much power in buyers hands and they push NTE if they are in financial turmoil themselves.

[nnayyar]

I am also a fan of the stock. I believe I was introduced to the name while researching IMOS and the name of the thread starter looks familiar. Perhaps I have seen it on Seeking Alpha comments or Yahoo Msg Board? In either case, both IMOS and NTE have some very good discussion on Yahoo msg board (believe it or not) including some very large Page 1 holders.

 

Regarding NTE, not much more I can add other then the following:

1) The stock was poised to break $17 after their latest earnings report until the CEO made a comment regarding Gross Margins going forward on the conference call that seemed to spook everyone and caused stock to trade ~$13. An article on SA responded:

http://seekingalpha.com/article/1139641-nam-tai-story-intact-we-don-t-believe-the-gm-guidance

 

2) The holders list is dominated by Peter Kellog of the old SLK. IAT reinsurance is his investment vehicle so his position is even larger then first glance. Also, Kahn Brothers owns about 6.5% of the company as well, a very well known value fund.

 

3) A very good blog also has done some work on the name:

http://reminiscencesofastockblogger.com/category/nam-tai-nte/

 

Obviously the Real Estate is a very big potential catalyst but that seems a few months if not years away.

 

BTW, happy and excited to be on this board! I recognize some twitter people on here already who i highly respect.

[nnayyar]

$NTE has sold off ~10% or so from it's recent range without any significant news that I see. It's likely related to weakness in the Russell Index the past few days and some technical stops from the momentum crowd however there have been some recent developments to point out. As stated above, the companies financials are sound and it's earnings can expand significantly on AAPL business.

 

AAPL will be launching some new products likely in the summer:

AAPL Apple to begin production of next iPhone in Q2 - DJ

http://www.marketwatch.com/story/apple-to-begin-iphone-production-this-quarter-2013-04-02-161035840

 

There's also potential new business from Sony (both Sharp and Japan Display are large customers of NTE):

http://www.ubergizmo.com/2013/03/sony-xperia-z-gets-display-from-two-suppliers/

It looks like this product is quite successful at the moment (incidentally, time to look at $SNE again based on this?):

http://www.digitimes.com/news/a20130311PD206.html

 

There has also been some interesting discussion on the value of the land:

http://www.eeo.com.cn/ens/2013/0201/239576.shtml

This article states that Shenzhen is running out of land and will be allowed to be sold in the open market. I am not an expert whatsoever with this area other then that NTE has stated the land is near the highway and airport and approximately equal to 1MM sq ft (from latest cc) . There's one poster on Yahoo Msg Boards which attempts to value it:

 

I've spent some time looking for it as well. After much searching I believe I've located it. For some reason Google translates the road it's on as "Nantai Road" with an "n" instead of "Nam Tai Road." If you map Nantai Road Shenzhen, China, you should be able to find the parcel. It's about 12 acres that is adjacent to the G107 highway and backs up to a canal. Your assessment of the area being a down and dirty industrial area seems accurate from the satellite images.

 

I've also done research into the Qianhai "Hong Kong Shenzhen Modern Service Zone" and have concluded that Nam Tai's factory is at least 4 miles away from the special 15 sq km zone. I do not doubt that the factory has been re-zoned as the company says, but I'm pretty sure it is not in the actual economic zone. I hope NTE can provide some more clarification on this point.

 

However, $1 per share is way too low. That price would value the land for about $45m which is $3.75m per acre and $15 a buildable foot for the new zoning. I don't think you can find infill commercial land, industrial or office, in any major city in the US for that price much less one the largest and fastest growing in China. At the end of the day, rents for commercial property drive land value. Office rents in Shenzhen are comparable to Boston at around $60 to $70 psf.

 

My estimate for fair value is anywhere between $50 per buildable foot to $100 per buildable foot, which would value the parcel between $150m and $300m or around $3 and $6 per share. It may be higher, but since it is not in the actual special zone I wouldn't bet on it at this point.

 

I hope I'm wrong, but I feel good that a $3 to $6 per share value is a fair range. Anyone who would claim it's worth a lot more needs to make the case that rents will be much higher than in Shenzhen center or even the real Manhattan for that matter.

 

Obviously anything on Yahoo Msg Boards needs to be taken with a big grain of salt but it's a starting area for further research. I did a Google search on Bao'an, Shenzhen, China: http://en.wikipedia.org/wiki/Bao%27an_District

According to Wiki, Bao'an Disctrict has a bad crime problem which would obviously lower the real estate value. However the offset is the government is trying to rezone into commercial land. Long story short, the real estate is worth something meaningful but how much is yet to be determined. If any readers have some expertise in the region, please feel free to comment!

[DTEJD1997]

NTE's land is clearly valuable.  Mr. Koo confirmed this directly in the latest conference call.

 

NTE has a history of buying land cheap and then selling for a nice profit years later.  I don't see why this time would be any different.

 

There is no way that land is worth $3-$6 sq. ft.  It is worth more.

 

I am skeptical that the land is worth a billion USD, but I would not be at surprised if it is worth $200 to $300 million like you think it might be worth.

 

I had heard that the land WAS in the special economic zone....

 

HOWEVER, all of this is still at LEAST 1 year away, likely 2+ years.  A lot can change in that timeframe.  China could peak, collapse and then start booming again in a 2-3 year period!

 

Clearly the land is worth a lot,  probably safe to assume $3/share, but potentially a LOT more. 

 

Even without the land NTE is very cheap.  This next quarter might be rough, but after that, I think the stock will start to run higher.

 

We'll see.

[DTEJD1997]

Hey all:

 

I bought more NTE on today's dip.

 

I had some shares of BBBI that had appreciated significantly since I bought it, and they weren't making any more progress on earnings at this point.  So I figured I would take the gain and redeploy it into NTE.

 

I have a suspicion that NTE will report good numbers and good news on Monday AM.  Apple had relatively good sales volume of Ipads and Iphones.  So I am going to guess that NTE got a chunk of that.

 

I think we could also see announcements on additional contracts or perhaps some more comments about land valuation.

 

Any way you wish to slice it, NTE is cheap.  P/E is going to be well less than 8.  Debt free, cash of $5/share, dividend yield of 5%+, significant value in real estate that is going to realized soon, potentially explosive earnings growth....I am hard pressed to think of a better value at this point.

 

Any thoughts?

[17thstcapital]

Good numbers and good news does not equate to a higher stock price for this name.  Last Q proved that.  ;)

 

I don't expect much from this investment - one day it should reprice higher, just don't know when......

[nnayyar]

Hey all:

 

I bought more NTE on today's dip.

 

I had some shares of BBBI that had appreciated significantly since I bought it, and they weren't making any more progress on earnings at this point.  So I figured I would take the gain and redeploy it into NTE.

 

I have a suspicion that NTE will report good numbers and good news on Monday AM.  Apple had relatively good sales volume of Ipads and Iphones.  So I am going to guess that NTE got a chunk of that.

 

I think we could also see announcements on additional contracts or perhaps some more comments about land valuation.

 

Any way you wish to slice it, NTE is cheap.  P/E is going to be well less than 8.  Debt free, cash of $5/share, dividend yield of 5%+, significant value in real estate that is going to realized soon, potentially explosive earnings growth....I am hard pressed to think of a better value at this point.

 

Any thoughts?

 

The analyst at Topeka slashed his PT to $15 from $20 and called it an 'asset play' as opposed to a growth stock. He slashed his revenue estimate from 1.1B to 550MM!! in 2013 and I believe 750MM in 2014 and something like 0.50 EPS in 2014. He also gave the real estate a 6.50/sh value. The note is only 1 page but there isn't a lot to it in my opinion - well AAPL guidance was poor and the other suppliers whiffed so I'll slash my numbers. He admits that there could be upside if AAPL units improve or the new products are launched soon. I also admit that AAPL delaying its new phones till SEP will be a drag as people wait on buying new phones till the upgrade comes out.

 

So he slashed revs by ~45%. I took a quick look at what the street did to CRUS and looks like they took it down ~20% so this is a big cut! NTE is tough to figure out how much is Iphone business, Ipad, tablet, and if IGZO screens are part of the revenue stream.

 

Let's look another way, the maximum capacity they will be able to make when all facilities are completed is ~3.9B in revs. For 2012 they did ~1.1B in revs or 30% of max capacity. Management guided to about 70% cap utilization by the end of 2013, the same management that talked down GM on the last conference call, which would be 2.7B in revs. If Topeka is right, then management just made an absolutely HUGE blunder. Considering the owners are the likes of Peter Kellogg from SLK and Kahn Brothers, has been operating for a few decades, I find it hard to believe they could completely screw up the projection that badly. Even at 50% your looking at almost 2B in revs! This from a company with market cap of $500MM.

 

I guess we'll have to see when they print the quarter on Monday. In the meantime, the stock yields 5% and has a long dividend history.

 

 

[mankap]

Thanks for posting this.

It is hard to believe 500m in rev for 2013.NTE was doing 500m even before the started working on LCM's and wuxi was up and running.I think it is a good opportunity to add at low prices.

[DTEJD1997]

nnayyar:

 

If NTE has net income of $.50/share in 2014, I'll eat my hat!!!  Something seriously wrong will have happened, that is for sure.

 

That number just does not make any sense at all.  Fourth Quarter earnings were $.80/share.  They did not have a full quarter's production of Iphone panels even...

 

I doubt 1st quarter will be as good the 4th quarter, but I don't see how it is not better than the YOY period.

 

$550MM in sales for 2013?  Sales were $468MM in 4th quarter 2012!  The number of Ipads & Iphone sales is still increasing, albeit at a slower pace, so how is NTE going to do SUBSTANTIALLY LESS in sales?  Maybe AAPL has decided they don't want to work with NTE?

 

NTE executives decided to turn their bonuses into stock instead of taking cash, did they know something?  Or maybe they just felt like gambling...

 

NTE is adding capacity and hiring thousands of more workers.

 

NTE is getting in automobile displays and "ultrabooks" and there are rumors that they are working on displays for smaller companies such as Sony.

 

So somebody has made a very serious mistake here.  Either Mr. Koo has made a HORRIBLE blunder and did everything WRONG, along with a lot of people observing anecdotal evidence (good discussion over on Yahoo!) OR Brian White is not making sense.

 

We'll see in a few days...

[17thstcapital]

So somebody has made a very serious mistake here.  Either Mr. Koo has made a HORRIBLE blunder and did everything WRONG, along with a lot of people observing anecdotal evidence (good discussion over on Yahoo!) OR Brian White is not making sense.

 

Spending even 5 minutes listening to or reading Brian White research is probably 5 minutes too many.  To call him an analyst is an insult to wall street analysts.  He may be right here because at some point everyone gets something right but I would never invest or not invest because of his research.

[nnayyar]

The last conference call actually touches on declining AAPL volumes as well as Capacity Utilization math, will post relevant parts:

http://seekingalpha.com/article/1138181-nam-tai-electronics-management-discusses-q4-2012-results-earnings-call-transcript

 

Regarding Cap Utilizaton:

 

Peter Stovell - First Light Advisors

 

Mr. Koo the website is, the new website is significant improvement, thanks very much for that. I’m wondering if could help me. On the website it talks about production capacity, each of the different manufacturing facilities when they are fully utilized, being around $150 million per month, per facility. Is the basis of those numbers on the current product mix and average selling prices?

 

And the follow-up question is, two follow-up questions, what is the current capacity utilization at each facility? And in the third quarter press release you talked about reaching full capacity at the end of 2013 and I was wondering if you could talk about any visibility on capacity utilization as we move towards the end of 2013? Thank you very much.

Ming Kown Koo - Chairman & Chief Financial Officer

 

Thank you. Yes, the $150 million, each facility, two facility in total is $300 million combined is set up. The capacity from the beginning, the capital investment based on the production size and then we have considered a part of unit size, times the forecast quantity for the output and then it comes out to a $300 million total. The second question is that the capacity utilization for the company is around 30% total.

Peter Stovell - First Light Advisors

 

What was that number, sorry?

Ming Kown Koo - Chairman & Chief Financial Officer

 

30%, 30.

Peter Stovell - First Light Advisors

 

30%, 30, got it.

Ming Kown Koo - Chairman & Chief Financial Officer

 

Yes, because also consider about how long the holiday time is, the New Year holiday.

Peter Stovell - First Light Advisors

 

Yes sir.

Ming Kown Koo - Chairman & Chief Financial Officer

 

And length of fee is that. What was the third question?

Peter Stovell - First Light Advisors

 

The third question was in visibility in the third quarter, the third quarter earnings transcript you mentioned moving towards full capacity by the end of 2013 across the two facilities and I’m wondering if you have any visibility in terms of capacity utilization towards the end of 2013.

Ming Kown Koo - Chairman & Chief Financial Officer

 

Yes, two its now is considered, especially in the third quarter and the fourth quarter it means the last half year would be coming more PC and then will be full capacity of the year, of the year 2013.

 

Regarding Declining AAPL Volume:

Unidentified Analyst

 

Hi, great quarter. Just a couple of questions for Mr. Koo. This is more of the side of products and of course in the newspaper we are seeing comments about Apple’s demand for products, so that in general kind of indicates there might be some slow down from Apple. But specifically, can you talk about the diversification of customers or product mix going forward, future generations of new products that we all know that are coming out. But in specific, how dependant on Sharp is Nam Tai and what are the programs that we work with them on besides just the tab. Thank you.

Ming Kown Koo - Chairman & Chief Financial Officer

 

Oh yes, thanks. We probably are a direct customer and they have considered, requested the company to have an investment to view the new products in line for the tablet and/or for the Smartphone and their original forecast is exactly for one million per month, the units and for the (inaudible) it’s a form leading to the unit in months.

 

But some of the fiscal on the delivery and the order will be saturate and we never achieved such kind of target. So perpetually its there, but we never achieved. So in case of the order comes from the end buyer is maybe changing, so the impact to us is not so serious. We can see that from our company that will promise, so.

 

And for the future of our customer, direct customer, you know by this way they can get more of a order for the Smartphone or tablets from our other customer. So this is also -- we have told them and then as a production partner we will coordinate and share their order for viewing the LCM for their end buyer.

 

Regarding the shop, we were working with them for the -- including the Ultrabook computer and also if (inaudible) the manufacturer, how to use our technology in our production, our facility to view or combine together with (inaudible) and the LCD space together. This is what is helping us to free up our perpetuity and then according to our closed corporate margin.

 

Unidentified Analyst

 

Okay and then in general as we move down the technology curves in terms of innovation, which we have a sense that’s occurring in the next generation of phones and tablets. Based on those revenue numbers that you’re currently producing, I’m assuming, but if I could hear you respond, that your doing a tremendous job in terms of being able to incorporate the new technology changes into your production.

Ming Kown Koo - Chairman & Chief Financial Officer

 

Yes, and also we have to consider for assisting our empire for our two direct customers, is consider about some of the products necessary for another company investment, and then for the Smartphone and the tablet and then the company to consider is the end support for guaranteed covering investment type of reasonable return or not, we are under consider.

 

Anyway, some of the models are not necessary to access the new products in line or machinery, if we find. But some of the order is necessary for another capital investment and then its under the consideration and discussion.

 

If we for now its not secure and then the order is really unstable or something like that, then we’ll worry about the capital investment and not capital (inaudible) we have, so maybe yes, we’ll keep off some of the model.

 

Unidentified Analyst

 

And then the last question I think on this round is, are we working on a next generation Smartphone for JDC and if so, when could we expect that to be in production?

Ming Kown Koo - Chairman & Chief Financial Officer

 

Now, it maybe in the March or maybe in the May. It’s under discussion by our direct customer and the end buyer.

 

Unfortunately Mr. Koo doesn't speak great english so might have to read a few times.

[nnayyar]

WOW is all i can say. The magnitude of how ridiculous the Guidance is almost comical. Company builds a brand new facility, ramps up to 3+B in revs, wooops, we might just scrap the whole thing and develop real estate instead.

 

Flip side, new players might want to look at this as cash/NAV play with RE. Dividend will still be paid till end of the year. And a great story now to go with it.

[DTEJD1997]

Hey all:

 

NTE developments are somewhat shocking to me.

 

It appears that Brian White was off in his projections of revenue and profitability.  He was on the low side thankfully.

 

HOWEVER, there is potential problems going forward and he may be right that NTE is a potential asset play at this point.  I am not so sure about this...but here are my thoughts:

 

A). NTE may be up against larger panel suppliers to AAPL who are willing to run their factories at JUST above breakeven.  These larger players MAY also have a couple percent cost advantage over NTE being so large they get economies of scale and some efficiency.  When you are talking about a 5% margin, even 1% advantage can make a big difference!

 

Couple that with a slight downturn in AAPL demand and you've got big guys #1 & #2 saying they'll give up margin somewhat to run their plants FULL OUT.  Therefore, there is little left over for NTE.  AAPL is under margin pressure to begin with, so they'll go with Big GUY #1 & #2 to save a couple percent.  NTE gets to pick up the scraps....

 

B). AAPL probably has some very high end CNC type machinery installed in NTE's factories.  This works well when NTE is producing for them.  If AAPL pulls the contract, they probably pull that machinery.  SO NTE has a production line that is 85% complete, but missing certain key components.

 

So whichever other company wants to take advantage of NTE's facilities would have to install similar type machinery OR NTE will have to go on open market to purchase it, which could be cost prohibitive.

 

C).AAPL may have wanted NTE to invest further for multiple screen sized iPhones and next generation Ipads.  NTE counters we only 2 good quarters of production, and now we need to invest for the next generation?  We haven't paid off the equipment for the prior generation!  So NTE wanted comittments from AAPL on volume.  AAPL won't commit, so NTE passed.

 

I can't say I blame NTE.  NTE has plenty of cash and no debt.  If they shut down LCD production at the end of the contract, they still have the company and ready cash.

 

If NTE sinks all of it's capital into new equipment, what happens if the same thing happens?  They get 2 quarters of good production, then it is downhill and off to the new thing...NTE is in same place, but they have wasted their cash cushion.

 

All this is speculation on my part...and it could be that demand picks up and NTE continues to build AAPL product and everything works out relatively well.

 

So we'll see, but a bad day for me, that is for sure!

[nnayyar]

Spoke with IR and trying to formulate thoughts but it appears the negotiations are hinging upon penalties in delivery as opposed to selling price (which I originally suspected) Negotiations were continuing this week however there is ANOTHER supplier that is apparently offering more competitive rates. Unnamed supplier as of now.

 

I am not sure about AAPL supplied IP/machinery, that seems like quite a large project and with a potential new product launch coming up, perhaps AAPL just decided to use someone else all together and just allowing NTE to finish up some older units? Shifting precision machinery seems like a big multi-month project with lots of risk!

 

The RE actually sounds like an interesting oppty but will be years and depends on a number of approvals.

 

All in all, I'm still amazed how fast and ugly the situation got. Company just announced to the world that it's business model will completely change in Sept. Imagine if KO decides tomorrow to become an investment bank!

 

 

[mankap]

Looks like management does not have much confidence in the negotiations as they are talking about shutting the LCM lines.

We will know in couple of weeks if they can secure any other customer.

This is the risk of being dependent on two large customers with large purchasing power.