by Travis Johnson, Stock Gumshoe | August 10, 2010 11:03 am
Peter Schiff appears to be on the verge of an embarrassing clobbering today in his primary bid for the Republican Senate nomination down in the nutmeg state (see, I’m adjusting to Massachussets residency already — a few weeks ago I would have had to say “up” in the nutmeg state). Or I suppose I could have used the less disparaging “Constitution State,” but you get the idea.
So with Connecticut Tepublicans looking like they will end the political aspirations of Peter Schiff, despite a pretty vocal national following among Ron Paul libertarians and Tea Party folks, I thought we should throw him a bone and mention again that his pick of Skyworth Digital back in December of 2008 is still the best performing teaser pick I’ve ever sniffed out, still up over 1,000% despite the fact that over the last month or two it has fallen by about 40%.
Now, part of that is undoubtedly just a strong stomach — he was willing to recommend a very beaten down, high dividend Chinese stock at a time when the global markets were in complete collapse, something that would have frightened off a lot of investors … but it was undoubtedly a great investment suggestion. So when he started hinting at another stock in a very similar business in his latest Euro Pacific Growth Global Investor newsletter, it caught my attention — I don’t know whether he or his analysts have particular insight into the Chinese television market, but his past history has me intrigued enough to at least figure out what stock he’s touting this time.
For those who aren’t familiar with Schiff, he’s not a newsletter pusher — he’s a broker, but his free newsletter to his brokerage clients and other folks often hints at stocks that they think look good … without naming the stocks. Most newsletter folks will withhold the name of the stock until you subscribe to their newsletter, but Schiff wants brokerage clients, not subscribers, so he withholds the name until you talk to one of his brokers to see if the investment is appropriate for you.
I don’t really want to speak to one of Schiff’s brokers, so let’s see if I can identify this stock for you — it’s actually the second one that he teases in the current issue of his newsletter, here’s how he puts it:
“Company #2 provides solutions in the desktop monitor and LCD TV markets. Listed on both the Hong Kong and Singapore stock exchanges, the company has a $1.4 billion US market capitalization and is the largest monitor maker in the world. It commands a strong position in China, with major customers including: Dell, HPQ, IBM, Lenovo, and Fujitsu-Siemens.
“We like this monitor manufacturer for its position in China, a key growth driver in the global demand for both monitors and LCD TVs. According to the company, last year PC monitor shipments in China surged 33.7 % year-over-year, while China’s overall demand for LCD TVs increased by 106.4%.
“The company’s cost management is impressive. Though revenue was down in 2009 over 2008, internal cost cutting resulted in gross income rising 9% year-over-year. Based on the prior two semiannual payouts, the company offers a dividend yield of just under 3%.
“Risks in owning this company are: a market shift away from LCD products, increased competition eroding pricing power, and a world-wide recession affecting sales.”
So as you can see, nowhere near as hype-tastic as the typical newsletter folks — in large part because the rules for brokers are far more restrictive than the rules for journalists (which is where newsletters generally come down in the regulatory framework, as does your friendly neighborhood Stock Gumshoe). But still, no name … so I’ll have to tell you that this company is …
TPV Technology (0903 in Hong Kong, T18 in Singapore, TPVTF on the pink sheets, where volume is almost nonexistent)
Given the very low volume on the pink sheets and the fact that this trades mostly in Hong Kong and Singapore, markets that are never open at the same time as the US markets, this would be a case where owning the stock would be much easier if you can buy directly on foreign markets. You can do this with Schiff’s brokerage, of course, which is his main raison d’etre, but also perhaps less expensively through many discount brokers including E*Trade, Fidelity and Interactive Brokers, to name a few (that’s not a broker recommendation, just a note in case you’re unaware of the big leaps forward in foreign market trading for US investors — some brokers will require you to call them or set up a special account, but foreign trading is generally a lot easier for self-directed investors than it was when Schiff set up his brokerage 13 years ago). Euro Pacific Capital is what most would call a “traditional” brokerage, with commissions generally in the 2-3% range instead of a flat rate.
TPV is the biggest monitor maker in the world (including LCDs and the older CRT displays, which they apparently also still make), and one of the largest makers of LCD TVs — but they do so largely as a supplier to original equipment manufacturers (OEMs), which is how they got their start. They do now have their own TV and monitor brands, but the lion’s share of their revenue still comes in as a result of their long-term relationship with big TV makers.
And the stock is not terribly expensive, right now it’s trading for just under 10X the trailing earnings, and those earnings for the last 12 months were quite depressed compared to the prior year — so if you do think the market for desktop monitors and flat TVs will recover or boom, there may be sunnier skies ahead. And the trailing dividend (like many foreign firms they pay an annual dividend and an interim dividend) adds up to just about exactly 3%, though there’s no promise of what future dividends might be (to match the drop in earnings, the dividend was cut in recent reports).
If you want the details, the primary trading for TPV is in Hong Kong, where the overnight closing price was HK$4.88 — with trailing earnings of HK$0.52, and HK$0.16 in earnings for the past two semiannual periods. That price would translate to 63 cents for US investors (you might see a quote of 60 cents on the pink sheets, but as of this morning that was a trade from about two weeks ago — as with many “grey market” foreign stocks that can be bought on the pink sheets, you can probably buy the shares on the pinks if you’re willing to bid a bit over the “fair” price where it closed in HK … which I’ve done on occasion … but the real difficulty with illiquid pink sheets often comes when you want to sell, it can be hard to find a buyer unless you accept a seriously discounted price.) This is a fairly large company, though still technically a small cap by many measures — the market cap is about HK$11 billion, which comes in around US$1.4 billion.
And just as an aside, this is technically a foreign currency investment, with a lot of exposure to Chinese customers (more than 30% of sales per their last report), but if you buy these shares you’re probably getting a company that effectively reports and trades in US dollars — that’s because the HK dollar still has a pretty firm peg to the US dollar … for a while it carried roughly the same value as the Chinese Yuan, which was also pegged to the dollar, but the Yuan has been floating higher thanks to political pressure and the HK dollar peg remains. You would certainly get Chinese currency exposure through these shares, but that’s because a growing portion of their sales and much of their costs are in China (they manufacture in China, not surprisingly, and have been raising their wages — read “costs” considerably in recent years — though they’re also expanding manufacturing in Mexico and Eastern Europe).
The display industry is a very competitive one, which is one possible reason for a discounted valuation for TPV — the big Korean firms (LG and Samsung, particularly) are huge players in flat TV and monitor manufacturing, as are several Taiwanese companies, with Chimei Innolux being probably the most similar competitive company. And since many of the more expensive branded products are also made by the same relatively small number of manufacturers there’s often a good patent dispute (as is happening now with Sony, TPV and Chimei Innolux, for example), so that also comes into play as a potential risk. Big customers for TPV include Philips and Sharp, from what I read, and Philips is still a large institutional shareholder in TPV, though they reduced their holdings dramatically earlier this year (that ownership came from Philips’ sale of their display business to TPV half a dozen years ago, they recently sold a 10% stake to China’s Great Wall Computers and still hold about 3%).
If you want to start digging into the stock, another key development is that they’re planning to split the company next year — they announced that they will spin off their branded monitor/TV business in 2011, in part to reduce the conflict of interest as they build monitors for other companies and try to sell similar monitors under their own brand names. A brief article about their latest report is available here and the full presentation on the first quarter is available here [pdf file] (the stock fell about 20% this Spring, perhaps in part because of concerns over rising labor costs in Chinese factories, but that was before earnings were announced — the shares are more or less at the same price as they were after the quarterly announcement came out in June).
So … will this be another Chinese TV barnburner from Peter Schiff? It certainly doesn’t come with the advantage of an absurdly low valuation or a huge dividend yield like Skyworth Digital did, though you can argue that the stock is perhaps “reasonably undervalued” compared to peers — and, perhaps, a compelling buy if you think they’ll do well in what must be an extremely competitive marketplace. And while the PE of around 10 sounds pretty good, it’s also worth noting that you can buy much larger companies who also rely on similar product trends, like Corning (GLW) and LG Display (LPL), for less — both of those have both trailing and forward PE ratios in the single digits, and it’s hard for me to go out on a limb for a smaller company when those big guys are so inexpensive.
Which leads me to come to the preliminary conclustion that I’m not particularly excited about this one personally, but that’s mostly because the business seems to be such a competitive crucible that it’s hard to see big profit margins for anyone — the positive is clearly their large exposure to Chinese consumers, since that’s still a relatively under-penetrated market for large TVs and monitors, though one negative might be the fact that they’re still overwhelmingly a desktop monitor business in an increasingly mobile and laptop-focused world.
But then again, we have seen a few good picks from Schiff and his analysts — and I’ve been wrong before (many, many times if you’re keeping track). And really, it’s your money so the important thing is what you think — if you have an opinion on this Euro Pacific pick, just let us know what it is by sharing a comment below. And if you’re curious about how Schiff’s brokerage clients feel about his service (or want to share your experience), you can see the Stock Gumshoe Reviews page for Euro Pacific Capital here. Thanks!
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