Description

Investment Thesis

Sinmag (GTSM: 1580) is a quality small-cap Taiwanese company founded in 1983 (market cap: US$250mm, EV: US$230mm) that is cheap, generating roughly US$25mm in free cash, 10%+ FCF yield, with an attractive 5.5% dividend (70% div payout). My channel checks include  speaking with management, competitors, other fund managers and industry analysts. 

The company has been consistently generated free cash flow and profitable since 2005 (IPO in 2007). Sinmag has a strong balance sheet, consistently net cash since 2009 and has consistently paid out dividends the last 10 years. EBIT margins in the last 2-3 years have improved, given increase exposure to more profitable, single bakery segment and decline in less profitable supermarket segment (due to e-commerce competition for supermarkets) in China.

Given strong demand from independent bakery shops and chains, Sinmag in China is currently operating at full capacity and has growth ahead benefiting from rising urbanization and disposable income. Sinmag is targetting to also grow in ASEAN and Indian markets, with the goal of achieving 30% of China sales each. The quality of earnings historically has been good, with cash flow exceeding accounting earnings consistently and good corporate governance and transparency for a small-cap company.

The recent share price decline of 15% over the last few months since the company went ex-dividend on Aug 1 provides a good entry point at reasonable valuations. YTD as of Sep 2017, sales growth has been 6.2% (compared to 5.5% as of 1H 2017). The risk is China competition, macro and diversification into non-core businesses, but we place these risks as low and compensated by the cheap price we pay and attractive dividend yield.

Business model

Founded in 1983, Sinmag is now the biggest bakery equipment producer in Asia and China and #6 globally. Sinmag was listed in Taiwan Stock market in 2007. 

The company started operations as an importer/exporter of bakery machines and materials. In 1995, the firm established a partnership to begin manufacturing bakery equipment and is now the largest bakery equipment producer in Asia. Since 2008, the company has manufactured food service equipment, including chicken rotisserie, pizza equipment, meat saw/grinder, etc. 

The firm markets products globally under the Sinmag brand, with China being the largest sales contributor at 50%. Key clients in China include RT-Mart (6808 HK), Carrefour (FR), Gourmet Master (2723 TT, NT$347, OP), and local bakery chain stores. 

The company has a full range of bakery equipments of 150 different models sold in over 60 countries including US, Europe, Japan and Taiwan. Sinmag is adding about 10-15 new models/products each year. The range of bakery equipment covers planetary mixers, spiral mixers, pizza equipment, water coolers, convection ovens, deck ovens, etc. Pictures below. According to the company Sinmag is about 30-50% cheaper in China than the foreign brands, and Sinmag is 30-50% more expensive than Chinese brands. 

The company has over 1200 employees and 80,000 sq m manufacturing building in Wuxi China and Taiwan. 

China accounts for over half of sales, EBIT margins improving 

Currently, China accounts for over 50% of Sinmag sales. Management indicated its plant in China is currently running at full utilization with employees  working overtime as orders are robust. With the peak season approaching, Sinmag’s sales are on track to deliver 8% and 12% YoY growth in 3Q17 and 4Q17, respectively, accelerating from a 5.5% YoY rise in 1H17, which should help the stock. Sinmag has 40 branch offices in all major cities of China to sell and service directly to customer.

In our meeting with management, Sinmag highlighted the growth in single bakery shops in China had similarities that the bakery industry in Japan during 1960-1980 and Taiwan in 1980s. New single bakery shop appears everywhere in China at very fast speed. 

See segment contribution below – chain stores, single bakery has increased, while supermarket has declined (due to e-commerce). According to Sinmag, single bakery is most profitable/least profitable is supermarket, this explains why EBIT margins have expanded.

Pizza Hut in China has adopted Sinmag’s conveyor ovens in 40 newly open stores. They are making final testing conclusion and will officially adopt Sinmag conveyor oven with initial 20 ~ 30% allocation.

Sinmag is considering acquiring a plot of land next to its plant in China, which should help the firm further secure China’s growth potential. On top of existing subsidiaries in Malaysia and Thailand, Sinmag has sent sales representatives to India, Indonesia, Vietnam, Phil, Brazil to help local distributors.  Sinmag is targetting to also grow in ASEAN and Indian markets, with the goal of achieving 30% of China sales each.

Free cash flow 

Below are the last 10 years of FCF generation for Sinmag in US$ mm as of Dec year-end:

2017e: $25mm

2016:   $24mm

2015:   $12mm

2014:   $19mm 

2013:   $15mm

2012:   $14mm

2011:   $8mm

2010:   $6mm

2009:   $12mm

2008:   $0.4mm

2007: $2.7mm 

Consistent profitability

Below are the last 10 years of net margins for Sinmag as of Dec year-end. Even during 2008, the company had its lowest margins of 8.1%. As per the above FCF table, the company generated FCF even in 2008.

2017e: 12.5%

2016:   12.7%

2015:   11.5%

2014:   12.3%

2013:   12.6%

2012:   11.6%

2011:   13.4%

2010:   14.3%

2009:   12.8%

2008:   8.1%

2007:  9.2%

Valuation: 10% FCF yield, 5.5% dividend yield, 11-12x earnings

Sinmag (GTSM: 1580) is a quality small-cap Taiwanese company that Mr. Market offers at a attractive 10% FCF yield, 5.5% dividend, 11-12x forward earnings, net cash balance sheet, and growth prospects in China, and other parts of Asia. Maintenance capex is limited, and I expect the company to continue to generate free cash. I think the quality of earnings is good, and corporate governance better than the average company in Asia.

Today’s valuation on Sinmag is not silly cheap, but current valuations of 10%+ FCF yield with a 5.5% div yield is attractive in current market levels where global stock markets hit all time highs. Sinmag has a place in a global small-cap value portfolio. 

Additional Materials

Website: http://www.sinmag.com/comcontent_detail.html

Catalyst

Value is its own catalyst. Plus growth in China, expanding margins. Growth opportunities in ASEAN/India. 

Attractive dividends.