Monday, February 04, 2008

Comments on Longcheer's 2Q result

Just some comments from long cheer's result.

First they announced that they are going to give shares as a reward for their employee and their directors (with directors getting 11% out of the total shares allocated for reward). As per their usual style, they will skip off the net profit and instead focus on their increase in revenues and gross profit. When I looked at their detailed 2H financial statement, I saw that their net profit is a miserable 1% increment.

Revenue : 66% increase yty based on quarterly results
COGS : 74% increase yty
Gross profit: increase 20%
Net profit : increase 1%
Dividend announced : 0.018 per share

(The figures below are based in SGD using an exchange rate of 0.197427, based on just the half year results not the annualised one)

P/E (based on closing of 0.475, earnings on 2H08) : 8.34
Dividend yield (based on quarterly dividend) = 3.8%

I wonder what made the directors opt for a share reward scheme and what is the basis for their share reward scheme. Clearly the results is nothing to shout about. Browsing through, it seems that longcheer is facing either a competitive industry (they did mention that the average selling prices for handset solution had been decreasing but is now stabilised) or they do not have a competitive advantage. A comparison of their gross profit margins or net margins over the years will be illuminating to shed information in this aspect. Longcheer seriously need to control its operating cost in order to maintain or improve whatever thin net margins it is sitting on currently.

Their game plan to stay ahead of their competitors is to spend more on R&D to develop new handset solutions in line with changing market demands. They plan to market their products in overseas and domestic markets too. From what I see, to improve their net margins, there are the following ways:

1. Increase revenue by increasing volume sales
2. Increase revenue by increasing sales price
3. Cut cost
4. Product differentiation through R&D

I don't think they have much choice actually. They are currently doing (1) and (4), but still need to increase even more sales volume simply because if they charge too high, their customers can always run to their competitors. This is what happens when the company do not have the pricing power to control their products due to intense competition. Cut more cost?

PE low seems to be on the lower range, so it might represent a cheap valuation compared to a year ago. If anyone wants to enter it on the catalyst of 3G network finally being rolled out prior to Beijing Olympics, the best time should be now I suppose. For me, I'll stay out.