Monday, February 18, 2008

More on Aztech

Hi Stupidbear,

This is in response to your posting on Aztech. I've previously did some research on Aztec before for fun. So I added 2007's result into my spreadsheet to analyse a little more closely. These are the few points I noticed:

1. Turnover increases steadily, yes, but the net margins is rather low actually.


2006 is an exceptional year for aztech, so discounting the fact, the margin did grow at an admirable rate. But to me, the net margin this low suggests to me that the industry is quite competitive. Can you think of why customers would want to buy aztec's product? There are so many similar ones out there. What's so good about their product? Hard to have product differentiation, and their industry quite easy to penetrate in too.

Take note that their turnover is mainly coming from North/south america. It wasn't like that all the time. In 2004 and 2005, their main revenue comes from europe (40% turnover). In 2006, main revenue comes from Asia pacific (46%). But in 2007, 40% comes from north/south america. Considering the slowdown of demand from america, I wonder what kind of results aztech will get in 2008. Such a big shift yearly... does that mean their contract duration is rather short? How come one year is europe, the other from asia pac, the other from america?

2. Cost of goods sold (COGS) increases by a lot in 2007 because of higher labor costs over in China, and of rising yuan in their plant at Dong guan. This causes their 2007's gross profit and corresponding net profit to drop. Management also cited new labour law in china that might adversely affect their COGS. This is one thing I would look out in the coming reports.

3. Did you know aztech had negative accumulated earnings? It had been steadily decreasing though, meaning that it is turning round. It's still negative though. Does it matter to you that they have accumulated losses and never had a year of positive accumulated profit since 2003? I didn't check their annual report backdated from 1999. The gap is closing in though, so they might actually break even in this respect in the coming financial year.

in '000

4. Cash generated from operations is quite strong in aztech. Didn't calculate its free cash flow though. Ever wondered why aztech is giving dividends out? Could it be that they couldn't find better returns for their business? They paid increasing dividends through out the years though

2004--0.0025 per share

I think based on current price 0.265, their yield for 2007 is 6.60%. Quite good, but I'm worried about future dividend growth prospects though. Can they afford to keep on paying increasingly more dividend? Dividend CAGR of nearly 90%!!

5. I'm not comfortable with them going into construction materials business. This is afterall something out of their core business. I doubted their expertise in this area, and they surprised me with a contract award of a substantial amount. Their first award of 23 million is 8.6% of their 2007's total turnover. It remains to be seen what kind of margins they can earn from this new revenue stream. We can see it in 6 mths time actually, and whether aztech will continue to get their 2nd and 3rd contract continuation.

6. Based on net profits of $18, 177,000 and shares outstanding of 419,118,000 shares, current share price of $0.265,

EPS = 0.0434
P/E = 6.1 (range from 5.2 to 10 thereabouts)
ROE = 20.3% (from 2003's 5.8%, 11.7%, 15.7% to 2006's 24.8%)

Attractive enuff for you?

7. Current ratio from 2003 to 2007 range from 1.4 minimum to 1.8 maximum. Presently 1.7. Acid test range from 0.9 to 1.2, currently 1.2. I think they have no problems with inventory turnover, in fact it's getting better over the years in this respect. They are also getting less inventory as a ratio to their current assets. From 2003 figure of 43% to present of 30%. This is reflected much in their cash flow too...less money in inventory, more in other places (in aztech's case - in cash).

I really have no vested interest in Aztech, just wanted to share with you my findings. I'm neither for or against Aztech. Give me your comments too :)