Today I want to talk about this little known stock in my portfolio, Dutech Group Holding. The company was incorporated in 2000 and listed on the Mainboard of Singapore Exchange in August 2007. The Group is mainly involved in the manufacturing of ATM safes, gun safes ( High Security Products) and precision engineering products for semi conductors and automotive industries (Semiconductors). They are the largest in Asia in terms of sales volume and production capacity. More details on the products offered can be found in this link. Dutech Holding
Major Customers
The company is a original design manufacturer (ODM) of high security products and count some of the following companies as their customers
- Wincor Nixdorf
- Diebold
- Liberty Safe
- FoxConn
- Scientific Games
They supply ATM manufacturing and assembling to Wincor and Diebold, Gun safe and personal safe to Liberty Safe and gaming machines to Scientific Games.
Major Awards
- 200 Best Companies under US$1 Billion in Sales by Forbes Asia Magazine in 2008,
- Best 50 Chinese Companies in the next 30 Years by Founder Magazine in 2008,
- Best Suppliers by Wincor Nixdorf
- Excellent Suppliers by Ferrotec respectively.
- Special Process Vendor from Applied Materials enable Dutech to supply semiconductor parts to a broader customer base.
The awards given by their customers shows Dutech provide excellent service and quality to them and more recurring sales can be expected. According to the prospectus, the contracts from customers normally range from 1 to 5 years with a minimum order quantity. There is no fixed price so raw material price increase can be pass on. As Wincor is a major customer, it is exposed to customer concentration risk and the question was posed to the CEO during the AGM. He mentioned that they need to give Wincor a 5 years notice if they were to drop them and vice versa. The supply chain is complex and Wincor is dependent on them for majority of their parts. Hence the likelihood of them being dropped is very low and they are very comfortable with the current arrangement. In the prospectus, it was mentioned that Format is their main competitor in the ATM safe business as they are located near Wincor HQ in Germany. Dutech was able to compete due to being more efficient by having a lower production cost. In fact as a testament to Dutech efficiency, they acquired FORMAT in 2011! They took out their competitor. It was mentioned by the CEO that their main competitor is now Gunnebo who is listed Sweden and they are six times larger.
ATM Industry
The ATM industry is currently dominated by NCR, Wincor Nixdorf and Diebold. Based on an article by Bloomberg recently, Diebold is offering a cash and share offer for Wincor Nixdorf which will create a new ATM giant. The newly formed company will be the market leader with 35% market share and NCR having 25%. I spoke to the CEO during the last agm and he mentioned that this move has both good news and bad news for the company. The good news is Wincor and Diebold are both customers of Dutech and with their new strategy to focus on software, the large bulk of manufacturing will be outsourced to Dutech. However, as Dutech sold the same parts to both companies at different price, there will new negotiation on the pricing. ATM is a lower margin business compared to self-serve machines because they are recurring in nature. I was pleasantly surprised when the CEO mentioned that the life span of a ATM is 2 to 10 years depending on usage. For developed cities such as New York or London where usage, the replacement takes place every 2 to 3 years. The ATM itself is like a personal computer which requires upgrade/replacement. For ATM that is in less populated, the maximum it can last is maybe 10 years.
Certifications
Safes produced are certified by the following 3 certifications
- Underwriter Laboratories (UL) – An American worldwide safety consulting and certification company headquartered in Northbrook, Illinois.
- CEN – European Committee for Standardization, is an association that brings together the National Standardization Bodies of 33 European countries. Dutech ATMS are verified by organisations such as CNPP of France and VdS of Germany.
- CCC – China Compulsory Certificate certification
The company has to fulfill certain criteria in order to continue holding the UL certification. This certification is renewable every 7 years and subject to periodic verification by UL. In the event of non compliance, the certification will revoked. Per the prospectus, a manufacturer has to meet pre admission criteria such as high standards of manufacturing know-how technology, suitability of equipment, skilled engineering, specially trained labour and stringent quality process controls including ISO qualifications. This certification process will take approximately 3 years to obtain. It was further disclosed that in FY2012 annual report that Dutech products are in the fifth generation of CEN certification while the rest of the manufacturers are in the process of getting certification. This shows Dutech is years ahead of its competitor. The importance of this certification is that it creates a moat to entry for potential competitors as there is a lot of know how involved and long and tedious process to get certification. The first mover has huge advantage as they are not likely to be taken overnight as certification itself is 3 years! Furthermore in a manufacturing business, economy of scale does matter in procurement as they are probably able to obtain better prices. This cost leadership ensure better margin which will also protect the business moat. Assuming competitor and Dutech were to sell at the same price, it means Dutech will earn better profit and in the long run with a stronger balance sheet, Dutech will be in the position to acquire weaker competitors to further entrench their position in down times. If we are to be invested for the long term, we should look for a company with moat so that margins and market share can grow or be protected. CEN certified safe has better margin than UL and certification is required for insurance purpose so these regulatory moat are definitely easily identified. Vicom is the typical case of a company where moat is created due to regulations.
I will proceed to look at the financials and competitor in the next posting. Thanks for reading.
ifihadamilliondollarsblog 