bgting

My thoughts on this business ...

1. Low margin, or at least low gross margin, is a characteristic of this business. It is sort of a trading business, ie, trading electronic components. It buys and keeps stock from its suppliers and sell to customers, making the difference.

2. The products are somewhat like commodities. Customers will try to buy the same part from the lowest cost supplier. However, the main source of competition is not only related to the same part but rather another solution that can achieve the same function from another supplier. For example, the customer may choose to design-in a solution from TI rather than ADI. It could be due to cost, sales support or design support etc. Then the business could have gone to, say, Serial System or even TI itself.
http://www.excelpoint.com/products
http://www.serialsystem.com.sg/index.php/e...

3. If the customer gets big enough, the suppliers may wish to handle the sales and support by themselves.

4. It's stated in the announcement that its relationship with ADI goes back to 1987, so this doesn't look like something new. It isn't very clear what the improvement in the relationship is about and what the impact is. Probably an expansion in territory? Or maybe ADI is outsourcing more tasks to Excelpoint? However, ADI is just one of its numerous suppliers.

5. If a salesperson can book a sales for 1 million parts, it doesn't take two to book a sales for 2 million parts from the same customer if business is booming. So during an up-cycle, the top and bottom lines should grow faster than expenses. This means the net margin and hence profits should improve substantially. This is a characteristic of a marginal business.

6. During an up-cycle, larger orders from customers come in. With larger orders, cash is required to build up inventory to hold for customers. The company uses credit from suppliers and short term loans to fund the inventory build up. This causes current liabilities to increase. As goods are delivered and customers are billed but payments are not received yet, accounts receivable also increases. Thus, cash flow appears negatively impacted. This seems to be what is happening.

7. As conditions stabilize, the inventory build up should slow. As payments from customers come in, payments to suppliers are made. The leftover are cash earnings. The high leverage will make the ROE look good as net margin improves. Gross margin may stay low or may go even lower because customers will request for lower prices for higher quantities.

8. As the cycle turns down, orders falls. If the company is alert to this, it will wind down the inventory level. This would mean cash build-up as inventory is converted into cash. This will make the cash flow look good.

9. However, if the company is not alert enough or the cycle turns suddenly, we can imagine all sorts of risks such as counter party risks due to late payments from customers and customers defaults, inventory obsolescence that needs to be written down resulting in losses etc.

10. The competence of the management lies in management of these risks while deriving an adequate return.

11. For such a cyclical business, it is quite usual that market gives a larger discount to the share price. The lack of interest in the stock could be because there were those who were caught out in previous cycle peaks and learnt the lesson the hard way. Some may even be hoping to exit when share price goes up. However, if the business expansion and bull market lasts long enough, net profit and dividends should start to look good. This may garner market interest, until the cycle turns yet again. Long term shareholders who are willing to ride through the ups and downs have to depend on dividends for returns over the years.

From the look of it, it does imply that we're probably in an up-cycle. However, by looking just at one company is not good enough to pass such as a strong judgement. Hope this cycle lasts a bit longer. These are just some of my thoughts and I am not from this industry, so can't be sure how correct I am. I'm currently not vested. DYODD. :-)

fiftysevenbucks

Reply to @bgting : could not agree more with you. I have divested my holding the next day after the result out due to low margin.

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seanie

@salvatore what are ur plans for excel

seanie

Reply to @Salvatore : Seems like a lot of people selling out... as the price slides day by day.. just like the last results

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lt_investor

Looking at how Venture, AEM, Hi-P, Fisher Tech, valuetronics and even Jadason had been rising but not excelpoint, i started to be aware. Like what i mentioned previously, if under a bull market the price is not moving up, what do you think will happen in a downturn? Currently i am still vested with 40 lots which i am looking at opportunities to sell within the next few days. Somehow my fear and not confidence in this stock grow everyday. Just my view.

seanie

Reply to @lt_investor : Nice one... excel facing much selling pressure.. think not good at all

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