Monday, August 10, 2009

Delisted Company: Advance Modules Group Ltd (A62)


If you focus on blue chip stocks, you will probably not realise there are many companies delisted from SGX yearly, besides CK Tangs. Therefore, any analysis that excludes delisted or bankrupt companies risks having the survivorship bias.

Therefore, I decide to take a look at Advance Modules (A62) and a timeline of major happening from its listing in 2005 to delisting in August 1st, 2009.

Company Info:

The core business of Advance Modules is in the manufacturing of memory products which are used by giants in the IT industry like Dell, Hewlett Packard and IBM. The Group designs, develops and manufactures products for OEM customers as well as under its own brand names.


IPO Detail:


Net proceed: S$10.4m, uses
a) $3.5m expanding IC packaging so less reliant on packaging suppliers
b) $2.0m product development
c) $3.0m expand sales teams
d) $1.9m balance for working capitial

- Almost 20% uses for product development aka R&D. I am starting to hate R&D because it is a form of gambling by companies.
- Around 1/3 for packaging to reduce reliant. But can they be more efficient than suppliers?
- I will still prefer if IPOs was for capex with secured contracts.

Dividend policy of 50% of FY2005 profit
- gimmick to get people to buy its share? Not focus on building long-term sharehlder value?

Competitive Strength:

  • Emphasis on Product Development:
    - All companies do product development, so nothing unique
  • Established Brand Name using increasing revenue as proof
    - All IPOs must have increasing revenue so nothing unique
  • Competitive Cost Structure using Malayisa and PRC vs. US or European based competitor. Also centralised purchasing of raw materials to provide cost management:
    - There will be export tax, tariff to its oversea customers so it might not be as competitive
    - centralized might reduce flexibility and response time of different department
  • Good Relationships with Customers and Suppliers with 75.7% of revenue from repeat orders:
    - Important but is it reliant on a few big customers only. Also, does it means it cannot find new customers easily?
    - Relationship can be broken easily if competitor gives better terms unless long term contract
  • Strong Emphasis on Quality Control
    - Almost all companies tout quality but does it really helps? The additional costs and many examples of other companies that fail despite accredition indicate that quality isn't important to investor


Competition:

  • Anwell Technologies
  • Amplefield
  • AGVA Corporation
  • Ban Leong Technologies


People:

Mr Vincent Tan Hian Chong, Group Managing Director, since 2004 joined 1999.
Mr Hee Woon Loong, Executive Director, since 2005 joined 2000.
Mr Choo Sam Po, Executive Director, since 2005 joined 2000.
Mr Koh Yeow Lay, Executive Director and Group Financial Controller, since 2005, joined 2002.
Mr Low Peng Lum , Non-Executive Director, since 2005 joined 1999.
Mr Chua Beng Huat, Independent Director, since 2005.
Dr Dominic Er Kong Kiong, Independent Director, since 2005.
Mr Michael Tang Vee Mun, Independent Director, since 2005.

- Although I should not judge capability by age, but Mr Vincent Tan is only 33 and further more, handle 8 other companies?
- How can someone juggle time with 8 companies and perform well for each
- For a small cap companies, Mr Vincent Tan is in the Band B going to Band C in renumeration. Most companies starts with all A. (A indicates < $250,000, B < $499,999, C < $749,999). An alternative should be, he getting more shares as payment since the company is still so new.
- Mr Vincent Tan, Mr Hee, Mr Choo holds directorship position in Pen-Interconnect(the ultimate holding company), so they should be closely related.

Timeline:

(Note: SGX only limits to histories of announcement to August 2008)
3rd April 2008 : Joint Development with Advanpack Solution
Collaboration of facilities and exchange of CSP, Copper Pillar Bump, Paper Leadframe technology. No expected major capex, and hope to move up value chain as fully integrated memory product manufacturer.
Expected to contribute positively for FY2008.

- Too many jargons and technologies that I don't understand.
- Does exchange give away any advantage?

8th April 2008 : Answer to SGX queries
Q1) Net loss RM8.8m, and decrease in revenue by 60.2% from RM60.5m to RM24.1m, ability to sustain short-term obligations
A) Mention price erosion & oversupply and other companies in industry too

Q2) Breakdown costs of sales RM28.9m
A) Raw material 67%, Direct Labor 5%, Manufacturing Overhead 21.7%

Q3) Explain impairment loss on equipment increasing from RM2.9m to RM12.4m
A) Older machinery to reflect latest fair value.
Change from 10 years to 5 year depreciation

Q4) Revenue drops 60% to RM24.1m due to "production activity in Company's China subsidiaries"
A) Major client setup own production facility

Q5) Why prepayment for new machine and how machine are utilised for capacity
A) Requirement to deposit
Have 8000 8-inch wafers/mth when full utilisation

Q6) Cashflow remain tight, why still prepay
A) Shift to WLSCP that have patent

14th April 2008: Respond to auditors Horwath First Trust's opinion
Q1) Unable to obtain satisfactory audit evidence of sales amounting USD$14.3m for FY2005
A) Ongoing independent review

Q2) Unable to show appropriateness of net allowance for impariment of trade recv amounting to USD$10.5m for FY2006
A) Ongoing independent review

Q3) Does not seems to have sufficient profit to distribute Proposed Dividend of S$3.8m in FY2005
A) Have sufficient profit at time of decision

Q4) Incur net loss of RM6m and only RM0.5m cash;
A) Looks to raise funds by sale and leaseback of building.
Also looking for financier for funding via leasing of new WLSCP machineries

23rd April 2008: Appointment of CFO

7th May 2008: Redesignation of Director
Reason was in view by the new CFO but remain as non-Executive Director

28th May 2008: Transfer of shareholding

31st July 2008: Cessation of Group Operations Director
Reason was mutual consent

I stopped analyzing... too much details and too late already. The problems of the company seems to occur right away the first year and have decreasing revenue. The conclusion of the company is that the current shareholders will continuing to hold shares of the company. Therefore, they cannot sell it on public anymore.

Investment tips:

Why not?
  • 69.8% of trade recv only 2 major debtors
  • Do not handle forex risk despite customer mostly trade in US$
  • Restated statement for 2005
  • Do not invest in a company you don't understand. I have totally no clue about the technologies and impact that Advance Module Group mentions despite my IT background.


References:

  1. SIAS Research

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