Yorkey Optical - 2788.HK
All amounts in writeup in USD.
1 USD = 7.75 HKD.
Share price = $0.78 HKD = $0.10 USD
Business description
Yorkey Optical is a Hong-Kong based manufacturer of plastic and metallic parts for digital still cameras, copiers, computer peripherals, film camera, and has a new niche business in medical apparatus components. The company did $124m sales in 2007, with $82m from parts for digital still cameras.
The company’s largest customer is Ricoh, which comprises 22% of sales, and the top 5 customers comprise 57% of sales. The company claims to have long-term relationships with its main customers, which include Canon, Epson, Konica Minolta, Nikon, & Olympus.
The company website is at the following link and contains a bit of detail on the types of parts it makes:
http://www.yorkey-optical.com
Thesis
Yorkey Optical is a mundane business selling for a very cheap price. Market cap is $83m, Net cash is $129m, EV is negative $46m. Net income in TTM is $17m and in past 5 years is $28m, $23m, $20m, $11m, $10m. Management is paying out roughly 85% of net income in dividends, which occur twice yearly and in total were $24m in 2007 and $18m in 2006 (this is announced dividend, amount paid out on cash flow statement is slightly different due to timing of distribution). Earnings are off in first half of 2008, but the company is still very profitable, with $7m EBIT on $54m sales in 2008 H1, which translates to about $6.5m in operating net income. The company historically has produced lots of free cash, with capex only slightly higher than D&A.
The company has $129m cash, $34m AR, $9m inventory, and $31m PP&E vs. $27m in total liabilities, so there is some downside protection if business falters.
I can’t answer detailed questions about the business, as all I know is from basic internet digging, and I have not talked with management. At this price, I think the company is compelling as long as you believe management will not cheat you, which does not appear to be the case based on management’s actions up through this point and the general presentation of the company’s financial reports, which are admirably simple and straightforward. I believe this current undervaluation is due to a combination of big move in the stock (and the Hong Kong market in particular) combined with the company’s large cash cushion.
Ownership:
The company is 43% owned by Mr. Cheng Wen-Tao, the founder and CEO, and 21% owned by Ability Enterprise, a publicly-traded Taiwanese company.
Risks
There were reports that the company was going to delist in the summer, but the company put out a report on 8/5/08 saying it has no present intention to delist.
Minor related-party dealings.