My First Taiwanese Investment: Gigamedia (NASDAQ:GIGM)
July 22nd, 2007 by MarkAs I’ve written elsewhere, my investment choices are based only upon my estimation of each company’s financial prospects. I try not buy stock in companies because they’re “cool”, because I support what they do, or other reason external to their business prospects. I’m also limited by what I know. If I don’t know anything about a company, or the environment in which it operates, I can’t really make an informed evaluation of its business prospects.
The result of these two constraints has been that every company I’ve invested in has been based either in the US, or in China. There have been a few Taiwanese companies, I’ve looked at, but none of them were good buys. Contrary to what some zealous foreign bloggers here in Taiwan have accused me of, this isn’t due to some nefarious pro-blue conspiracy. There are just a lot more compelling investments in mainland China.
However, I have found and invested in an exception- Gigamedia (NASDAQ:GIGM). The company is small, the way I like them. It’s also in a fast growing industry- video games. With a solid balance sheet and rapidly growing earnings, I think it’s a steal.
The Financials
| 3 months Ending 2007-03-31 | 3 months Ending 2006-12-31 | 3 months Ending 2006-09-30 | 3 months Ending 2006-06-30 | 3 months Ending 2006-03-31 | |
| Total Revenue | 36.09 | 30.07 | 24.42 | 21.27 | 18.54 |
| Gross Profit | 28.75 | 23.53 | 18.43 | 15.76 | 13.20 |
Revenue in millions, data from Google Finance
That’s 94.7% revenue growth and a 117.8% growth in profits in a single year. Furthermore, their ROI is 29%, the bottom line on the balance sheet looks good, and they aren’t carrying much long term debt, either. With their current game franchises, there’s a steady stream of income, and there’s still a lot of room to grow both in Taiwan and on the mainland. In particular, I think their upcoming Mahjong for pay game in China has a bright future.
The Valuation
Right now, the valuation of Gigamedia ridiculously low by my estimation. The company’s profits doubled this year, and it has a trailing PE of less than 22. Even using my most conservative growth estimates, it’s worth a PE of 50. Barring some unknown weakness, this company is a steal at its current price.
The Risks
The biggest risk is competition. The online gaming markets are getting crowded, even in China.
Notes
I bought 150 shares of GIGM on Thursday. Having just sold out of Columbia Sportswear for about $800 more than the Gigamedia shares cost, I’ve paid off some of my margin debt.
Legal Disclaimer: All of the information in this article is accurate to the best of my knowledge. However, I make no guarantee about the accuracy of anything written above. I’m not responsible for any mis-typings, or any other errors in the information. If you purchase any stock solely because I did, you do so at your own risk.
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July 23rd, 2007 at 4:04 am
Hey,
Computer games companies are notoriously ‘feast or famine’. Accordingly there are very few that have lasted more than 5-10 years. EA being one example. How many can you name of the hundreds or thousands of games companies that have existed in the last 20-30 years?
In this case, look at the annualised figures to get a bigger picture of this company.
http://finance.google.com/finance?fstype=ii&q=GIGM
I think what is being seen is not growth, but merely one lucky year amidst 5-6 terrible years.
2001 - loss of 52mn
2002 - loss of 22mn
2003 - loss of 18mn
2004 - profit of 1.4mn
2005 - profit of 6.7mn
2006 - profit of 31mn
By saying a trailing PER of 22, you aren’t entirely representing the track record of this company fairly. They have lost more money in the last 6 years than they have made, by a factor of more than 2. Not only that, but they’ve been diluting their equity at a heck of a rate. Look at the outstanding shares.
Clearly, they’ve only been surviving on handouts from shareholders for the last 5 years (dilution of equity of 10%/year for the last few years), resulting in the apparent ‘recovery’. I’m not so sure - I think the shareholders are paying a high price for those supposed ‘profits’ in the last 2 years.
http://finance.google.com/finance?fstype=ii&q=GIGM
Finally, look at the diluted normalised EPS at the bottom of the page. It’s ugly.
Oh and another point. How did they generate their wonderful profits this year? By turning around the business? No, by flogging the family jewels. Look at the ‘gain on sale of assets’. They flogged off over 7 mill of assets to boost their profits this year.
Expenses are rocketing alongside revenue. But it’s harder to scale back expenses than to grow expenses. If revenue falls, I think another 2001 will be right behind for this company.
There *may* be a recovery story here, but it seems (to my view) to be extremely high risk. The record (2001-2003, and possibly earlier) demonstrates an incompetent management. The dilution of equity and sale of assets definitely makes me wonder how much of the ‘long awaited’ profit is real and how much is merely asset stripping and shareholder subsidy.
Mu
July 23rd, 2007 at 5:20 am
Mu, thank you! This is the first detailed comment on any investing posts of mine about a company’s business prospects!
In the numbers you’ve posted above, every year has been an improvement. While Gigamedia posted a huge loss in 2001, it cut that loss to less than half of that amount in 2002, cut it further in 2003, and has been profitable since. You’re definitely right that there’s some risk involved, though. Are there any specifics about the management that bother you? I’ve already bought the stock, but I’m all ears.
July 23rd, 2007 at 5:42 am
Nothing specific about the management, just the fact they were losing a ridiculous amount of money that exceeds the combined profits of the last few years, back in 2001. God only knows what happened before that. You may wish to find out.
And the fact that at least 1/4, probably 1/3 of the ‘profits’ this year are just from selling assets and issuing shares… and I suspect the rest of the profits are from acquiring a better run company to fake a ‘recovery’. But I don’t have time to investigate more closely - would encourage you to look and find out.
I am always amazed when people buy smallcaps on such high ratings. You can buy citigroup just now, for example (I don’t hold) - PER even without looking I can guess will be 11-12, dividend yield (without looking) around 4-5%, and today announced growth of 18% (which is why they came to mind!).
Smallcap with disastrous history in a field littered with dead companies, PER of 22. Megacap, PER of 11-12. And that’s just the first example that popped into mind…
Heck, this games company would need to pull another miracle out of the bag just to catch citigroup ‘of last year’. But given the debt they issued, the equity they issued, and the assets they sold off this year to get an ‘uncharacteristically good’ result out…. I don’t imagine too many more miracles. They emptied the rainy day fund already for this year.
Oh, one other thing. They managed to crawl along, achieving nothing, at a time when taiwanese interest rates were a mere 2%. Did they issue debt to expand then? No - they waited for interest rates to go up. Doh. And they issued equity when debt is cheap as hell. Doh.
From the balance sheet their intangible assets and goodwill are rocketing so no doubt they are trying to ‘acquire’ profits and revenue by picking up other companies. I haven’t checked the news so you’d have to find that out yourself. If so, that’s always fun to watch. Take one company, unprofitable for 5 years in the most encouraging economic conditions for expansion ever seen in taiwanese history. Add one competent company. Success! One bigger, mediocre company! Now, just keep issuing debt and equity and adding more and more companies (and showing more revenue growth and profit growht - while EPS flatlines) until it looks like you have ‘recovered’.
G
July 23rd, 2007 at 5:45 am
One other thing, you might enjoy the ‘turnover article’ on taoyuan nights, you can find it on the front page. A fun read
July 23rd, 2007 at 3:51 pm
[...] Doubting to Shuo invests in Gigamedia. [...]
July 23rd, 2007 at 10:58 pm
I have researched them fairly thoroughly. I could easily change my mind if I see a major problem, and I would only be out my $10 trading fee. However, with Gigamedia’s growing profits, excellent ROI, and good future prospects, I’m very bullish on them. Unknowns could always arise that make me change my mind, though.
July 23rd, 2007 at 11:48 pm
Oh well, I can only wish you the best of luck then.
One other thing you might be interested in looking into, is the potential for legal problems. Particularly since you’re investing on margin.
Take a look at this if you want to see why (that one day slump hit all poker companies in the UK).
http://uk.finance.yahoo.com/q/bc?s=PRTY.L&t=2y
October 12th, 2007 at 1:25 am
[...] quite a coincidence that today, the day I finally made a second Taiwanese investment, my first one has shot up like a pumpkin in September. It’s up by over 15% today and over 89% since I added [...]