If you have noticed from my recent portfolio updated post, you will have noticed that I had taken a position in this company. Till date, given the poor global sentiments (again!), I have divested my entire stake in EVA, suffered a 30% loss as I was proven to be too overly-bullish on this counter. The reason for this post is then to explain why I found it attractive in the first place, the reasons why it became a failure subsequently and why I felt this can still prove to be attractive in the future.
The attractiveness (or so) of EVA Precision:
To begin with, EVA Precision Holdings is a vertically-integrated precision metal and plastic mould & component manufacturing service provider. In other words, they are focused on the entire vertical implementation of metal & plastic component parts – right from the start of mould construction till the latter stages of moulding the specific component parts. Unlike all other plastic or metal stamping companies, EVA had a niche in providing office automation (OA) machines. Yes, those huge copiers (note: not printers) which you will often see in your office. EVA prides themselves in being able to produce such precised component parts which are essential for copiers. Just imagine the extent of precision which the different component parts needed in order for a copier to void any potential ‘paper jam’ issue.
However, what made EVA so attractive was not just in this ability but more so from its customers. EVA boasts a huge base of Japanese mega copier companies such as Canon, Fuji Xerox, Kyocera, Knoica Minolta & Epson. Of course, any company is able to mention that they have the capability to produce precised component parts (i.e Hi-P under SGX) but not many can boast such a strong base of Japanese customers – which we are know have high standards for their products.
The vast Japanese customer base validates EVA’s capability but what sealed the deal was the potential of a latter turnaround in its business profitability. On March 2011, the Japanese tsunami earthquake severely battered Japanese corporate’s supply chain and EVA was no doubt one of the ‘causalities’. However, on the brink of the unexpected disaster in FY2010, EVA had a record-high mould construction orders of HK$320 million. Management had stated that mould construction orders tend to be a leading indicator of future component sales. Mould construction orders, are simply orders to construct moulds which will be used to later produce the required component parts for the finished products (copiers in this case). Hence, if one was to expect a rise in mould orders, it will definitely make sense that there will be a similar hike in its orders for component parts, though the extent is not for certain (of which this killed my investment thesis latter on).
EVA was trading around HK$1.55 to HK$1.60 during the time of my notice and it was at around a 7x P/E multiple of FY2010 earnings (if I recall correctly). The valuation, though slightly high, was still attractive considering the customer base which EVA had. Moreover, I had a call with its CFO and everything seemed pretty positive.
Now… what went wrong?
It was around the peak of the short bullish run in 1Q 2012 when I bought EVA at around HK$1.65. At around a week later, I EVEN averaged up to hit an average unit cost of HK$1.70. Eventually, its FY11 results released and it did not meet up with expectations. PAT fell by 30% while net margins fell to 10%, lower than FY10’s 17.8%. Given the poor global outlook, there was a risk that EVA’s Japanese customers will switch to a lower margin product mix – printers – and this was going to affect EVA’s performance for 2011 & 2012. Moreover, such a poor result comes at a wrong timing as it coincided with the revised 7.5% GDP growth announced by Premier Wen. The counter eventually tanked. I was ATM of around 10.5% and ended up booking a 30% loss. So, what went wrong?
- Averaging based purely on emotions: I have to admit my decision averaging up had nothing to do with any fundamental improvement. Instead, it was a bet in hoping that I won’t ‘lose out’ in the bullish run. In retrospect, it would have been better to always wait for the result release rather than buying ‘hope’
- Committing too early in my investment: I knew about the poorer prospect which EVA will have to face in the near term when its customer base had to shift towards a product mix consisting of lower margins printers. My thesis was that the catalyst will be in 2-3 years time when the product cycle ended for the last copier model. Till then, the Japanese producers will have to come up with new copier models or else they might risk losing behind to its competitors. Knowing that, I should have sat out of this investment and probably review it when the catalyst date draws nearer. It’s akin to an option – always better alive than dead. But in this case, I chose to ‘exercise’ and be stuck with a costly investment.
Attractiveness for the future:
Despite the setback, I won’t say I am going to hate this stock for life. Given the recent sell-down to HK$0.98, it’s starting to provide a very large margin of safety. Of course, with my lessons learned, I am still going to sit this out for the time being as I believe its price can be beaten down further. Nonetheless, I still believe the shift back to copier products by 2013 or 2014 will be a strong catalyst for earning boost. I am definitely keeping this counter close in my watch list.