Why I like E&E?

I mentioned in my previous post that I like the stock mainly because of its generous divdends.
Here, I shall attempt to further justify my liking.

Earning Prospects and Growth

E&E survived and remained profitable during the Asian financial crisis in 1997, burst of dot-com bubble in 2000 as well as the outbreak of the second gulf war and SARS in 2003. This track record provides assurance that the company is strong enough to withstand turbulent times.

Although current credit crisis may soften market demand for PCB, healthy long-term outlook is supported by the growing importance of technology in our daily lives (eg. computers, laptops, handphones, etc). The postive long-term outlook is further bolstered by consumers' demand for higher speed, lighter weight, more functions and better performance for new electronics products as well as shortening of product life cycle. As one of the world's top PCB players , E&E is likely to benefit from the trend.

However, increasing competition and volatility in the prices of raw material pose challenges to its profitability, as evident in the lower profit margins in the recent years (average profit margin: FY1991 - 1999: 14.5% vs FY2000 - 2007: 10.6%). The problem is partially mitigated by E&E's close association with Kingboard Group, which allows E&E to enjoy preferential access to developemental capabilities and competitive pricing for raw materials. In addition, the Group is striving to improve profitability by shifting its product mix towards higher layer-count PCBs and is currently building a new plant to focus on HDI.

Admittedly, as someone unfamiliar with the development of electronics and technology, I do wonder what is the likelihood of PCB being substituted by something newer, cheaper and better, say, nanotechnology?

Financial Health

The Group has a strong balance sheet as at 30 September 2008. Cash and bank balances amounted to US$70.2m against total borrowings of US$180.0m. This translated to a net gearing of 29.5% which I think is a comfortable level.

A total of US$89.4m was generated from operations over the 9-month period. According to Note 7 in its latest results announcement (3Q FY2008), "the solid financial strength was driven by earnings growth and effective management of our cash conversion cycle".

Management

In my opinion, the Group has shown a proven record of strong operating cashflow and its management has exercised prudence by not over-relying on financial leverage to expand growth.

It is noted Kingboard has acquired a total of 679,000 shares of E&E at an average price of US$1.423 from the period April to Oct 2008. This, in a way, conveys the confidence of the directors in the company. However, the series of transaction has raised the deemed interest of Kingboard in E&E to over 71%. What is the probability of E&E taken private?

I've roughly looked at the historical financial performance of Kingboard Chemical Holdings Ltd. and find that the management has done a good job in increasing shareholders' value. Since E&E is the subsidiary of Kingboard and has owners of Kingboard on its board, I'm inclined to believe the performance of E&E will not be too far off the mark of Kingboard's.