Balance sheet investors generally look for value in three separate scenarios:
1) Discounts to tangible book value (overt or covert)
2) Discounts to net working capital
3) Discounts to cash and short term investments
The crème de la crème of asset bargains are companies which trade at a substantial discount to their cash and short term investments. In such cases the market is accessing that the company is either: 1) a fraud, or 2) possesses a negative business model. In the case of Actions Semiconductor (ACTS, Financial), I believe that neither of the aforementioned conditions fit the company. In my opinion the market has severely mispriced the value of Actions Semiconductor (ACTS) due to several reasons which will be discussed later in the article. ACTS is the subject of today's spotlight on value.
Discount to Cash and Cash Equivalents
It is extremely rare to find stocks which trade at discounts to cash and short-term investments (cash and short term investments less total liabilities greater than market capitalization). The reason would appear obvious: Such a company could easily liquidate all cash and short term investment holdings and promptly return the excess cash to the shareholders. Of course from a realistic point of view, very few public companies choose such a course for a number of different reasons. Those reasons are not the subject of today's article nor do I expect that ACTS would consider liquidation. Rather, I view the current discount of the company as a margin of safety which provides long term shareholders sufficient collateral to justify the wait until ACTS becomes once again profitable from a operational standpoint. As you will see later in the article, it appears that the company is likely to substantially approve profitability in the near future.
Business
From the 2010 Annual report:
We are a fabless semiconductor company that designs, develops and markets integrated platform solutions, including SoCs, firmware, software development tools and reference designs, for manufacturers of portable media players. We provide integrated platform solutions to portable media player manufacturers, brand owners and value-added distributors that enable them to accelerate the time-to-market for their products. Our integrated platform solutions incorporate the following features that enable our customers to rapidly bring portable media players to market with a minimum level of technology investment:
Our integrated platform solutions, which comprise SoCs, firmware, software development tools and reference designs, obviate the need for our customers to invest in costly and time-consuming internal firmware and software development for their products, or to source them from multiple suppliers.
Our network of third-party value-added distributors and applications developers enable our customers to quickly introduce products with differentiated features and to cost-effectively customize our solutions.
Our mixed-signal design capabilities allow us to integrate analog and digital components using a compact system architecture in our portable media player SoCs, and enable our customers to reduce their overall costs and produce smaller, more power-efficient portable products.
Our proximity to the China-based manufacturers of portable media players and presence in the rapidly evolving China market for portable media players enable us to better identify market trends and align our product development efforts with these market trends.
We believe that our integrated platform solution approach provides a high level of value for our customers and creates a successful business model for us. We seek to extend our market leadership in SoC products and platform solutions for the development of portable media players through investing in technology development, extending our network of independent software developers and value-added distributors, incorporating high-end features into products for the mass-market, and improving the functionality-to-price ratio of our products.
Catalyst
Last week ACTS raised revenue guidance for the current quarter ending September 30th, from 12-13 million to 15-15.5 million dollars. Additionally the company estimated gross margin at around 40%. From an operational stand point that places gross profit for the quarter at a minimum of 6 million dollars for the current quarter. That represents better than a two million dollar increase in gross profit quarter over quarter. Further, the projected quarterly revenue figure represents the highest quarterly sales figure since 2008.
Bear in mind that ACTS has returned to profitability albeit not on an operational basis. The company has invested their large cash horde in Chinese banks drawing substantial interest income. Recently the management has started enacting their own US carry trade to enhance investment returns. The company has borrowed 12 million from US banks and converted the loans into Chinese currency at a favorable exchange rate; the converted currency is then reinvested in Chinese interest bearing investments.
To summarize the company has been savvy enough to borrow at low US rates, convert the currency into renminbi RMB (which has appreciated) and reinvest the converted currency into substantially higher rates of returns than the interest on the loans. The result in the last quarter was a profit in investment and other income of slightly greater than 4.7 million dollars.
The end result of the increases in gross profit and investment income for ACTS in the current quarter will be a substantial increase in net income; although the increase in net income will be slightly mitigated by increases in R&D. Overall the current quarter should provide the company with their highest quarter of net income since 2008 and that is likely to propel the price per share upward looking forward.
ACTS is Not an Reverse Merger
It is important to note that ACTS was IPOed in 2005 on the Hang Seng; it trades in the US in the form of ADR. The current epidemic of fraudulent Chinese companies has almost exclusively been a function of companies which have come to market as reverse mergers. Reverse mergers are much easier to bring to market and come under considerable less regulatory scrutiny than an initial public offering (IPO).
Additionally, ACTS has a top auditor in the form of Deloitte and has never provided sales or income which appeared to be unreal in nature. Quite the contrary has been the case; the companies' numbers have been dismal in recent years. Declining revenues have largely been a result of steadily dwindling MP3 sales which have historically been the major source of the companies' sales. The company has been highly dependent upon the non-Apple portable media player market which has experienced steady decline in popularity and profit margin in the last several years.
Valuation
As of the last quarter ACTS has approximately 2.79 per fully diluted share in cash and short term investments when all liabilities are deducted. That places the company at about .73 times cash and short term securities. ACTS has a fully diluted book value of around 3.77 dollars per share and currently trades at just over two dollars a share. That represents around .54 times book value.
The company is slowly but steadily buying back shares as market conditions allow. Every share which is repurchased at current levels results in an increase in tangible book value per share in addition to increasing the discount to cash and short term investments per share.
Bear in mind that ACTS is now profitable in terms of net income and significantly improving operational results. However the company is trading as if it was draining equity on a steady basis. Quite the contrary is true, despite significant decreases in revenues and operational profitability per share since in the past several years, ACTS has increased book value per share in every years since its 2005 IPO.
Industry: Semiconductor - Specialized
It should be noted that the current valuation of .54 book value is near the companies' historical low price to book ratio recorded in late 2008 and early 2009.
Intellectual Properties
The company holds the following intellectual properties:
As of December 31, 2010, we held 81 issued patents and had 107 pending patent applications in PRC, nine pending patent applications in the United States and nine pending patent applications in the European Union. We intend to continue to assess appropriate occasions for seeking patent protection for those aspects of our technology that we believe provide significant competitive advantages. In addition, we owned 18 registered layout designs and 22 registered computer software copyrights in the PRC.
We held 26 registered trademarks and 40 pending trademark applications in the PRC as of December 31, 2010. In addition, we also held four registered trademarks in Hong Kong, four in Taiwan, four in the United States, four in the European Union, three in Australia, three in Russia, three in Korea, three in Singapore, two in Japan, three in Canada and one in India as of December 31, 2010. Our trademarks include Actions, Actions Semiconductor, and Actions Semiconductor logo. These trademarks remain valid while we continue to use and renew them.
We have established an intellectual property rights, or IPR, department which serves our entire organization and undertakes patent application, trademark registration, integrated circuit layout design [registration?], software copyright registration, and related legal affairs. As of December 31, 2010, we had seven in-house intellectual property legal counsels and engineers who worked closely with all departments including marketing, research and development and had extensive connections with external law firms and intellectual property offices.
Source: 2010 Annual Report
Reason for Mispricing
The opportunity to purchase shares of ACTS at a substantial discount to it cash and short term is investment is likely due to the following factors:
1) General mistrust in Chinese companies due to rampant fraud
2) Declining revenues and margins in recent years
3) General pessimistic market conditions
ACTS could be classified as a broken IPO; the company was brought public in the Fall of 2005 at 8.00 per share.
The following table depicts the drop off in sales and EBIT which along with other factors has precipitated the sell off:
Income Statement - 10 Year Summary (in Millions)
Balance Sheet - 10 Year Summary (in Millions)
Summary
Actions Semiconductor (ACTS) offers value investors a chance to buy a legitimate company at a 27% discount to its cash and short term investments less total liabilities. Such net/net propositions are extremely rare and are usually a result of a failing company which unwilling to liquidate its assets.
ACTS does not appear to be failing; instead it appears the company is returning to operational profitability. Additionally, the company is currently profitable due to its investment returns which are a function of the companies' large cash horde.
The recent upward guidance issued last week should ensure that ACTS will experience its best quarter in three years. The recent improvements in operational results are likely to propel the stock much closer to its intrinsic balance sheet value.
Disclosure: Long ACTS
1) Discounts to tangible book value (overt or covert)
2) Discounts to net working capital
3) Discounts to cash and short term investments
The crème de la crème of asset bargains are companies which trade at a substantial discount to their cash and short term investments. In such cases the market is accessing that the company is either: 1) a fraud, or 2) possesses a negative business model. In the case of Actions Semiconductor (ACTS, Financial), I believe that neither of the aforementioned conditions fit the company. In my opinion the market has severely mispriced the value of Actions Semiconductor (ACTS) due to several reasons which will be discussed later in the article. ACTS is the subject of today's spotlight on value.
Discount to Cash and Cash Equivalents
It is extremely rare to find stocks which trade at discounts to cash and short-term investments (cash and short term investments less total liabilities greater than market capitalization). The reason would appear obvious: Such a company could easily liquidate all cash and short term investment holdings and promptly return the excess cash to the shareholders. Of course from a realistic point of view, very few public companies choose such a course for a number of different reasons. Those reasons are not the subject of today's article nor do I expect that ACTS would consider liquidation. Rather, I view the current discount of the company as a margin of safety which provides long term shareholders sufficient collateral to justify the wait until ACTS becomes once again profitable from a operational standpoint. As you will see later in the article, it appears that the company is likely to substantially approve profitability in the near future.
Business
From the 2010 Annual report:
We are a fabless semiconductor company that designs, develops and markets integrated platform solutions, including SoCs, firmware, software development tools and reference designs, for manufacturers of portable media players. We provide integrated platform solutions to portable media player manufacturers, brand owners and value-added distributors that enable them to accelerate the time-to-market for their products. Our integrated platform solutions incorporate the following features that enable our customers to rapidly bring portable media players to market with a minimum level of technology investment:
Our integrated platform solutions, which comprise SoCs, firmware, software development tools and reference designs, obviate the need for our customers to invest in costly and time-consuming internal firmware and software development for their products, or to source them from multiple suppliers.
Our network of third-party value-added distributors and applications developers enable our customers to quickly introduce products with differentiated features and to cost-effectively customize our solutions.
Our mixed-signal design capabilities allow us to integrate analog and digital components using a compact system architecture in our portable media player SoCs, and enable our customers to reduce their overall costs and produce smaller, more power-efficient portable products.
Our proximity to the China-based manufacturers of portable media players and presence in the rapidly evolving China market for portable media players enable us to better identify market trends and align our product development efforts with these market trends.
We believe that our integrated platform solution approach provides a high level of value for our customers and creates a successful business model for us. We seek to extend our market leadership in SoC products and platform solutions for the development of portable media players through investing in technology development, extending our network of independent software developers and value-added distributors, incorporating high-end features into products for the mass-market, and improving the functionality-to-price ratio of our products.
Catalyst
Last week ACTS raised revenue guidance for the current quarter ending September 30th, from 12-13 million to 15-15.5 million dollars. Additionally the company estimated gross margin at around 40%. From an operational stand point that places gross profit for the quarter at a minimum of 6 million dollars for the current quarter. That represents better than a two million dollar increase in gross profit quarter over quarter. Further, the projected quarterly revenue figure represents the highest quarterly sales figure since 2008.
Bear in mind that ACTS has returned to profitability albeit not on an operational basis. The company has invested their large cash horde in Chinese banks drawing substantial interest income. Recently the management has started enacting their own US carry trade to enhance investment returns. The company has borrowed 12 million from US banks and converted the loans into Chinese currency at a favorable exchange rate; the converted currency is then reinvested in Chinese interest bearing investments.
To summarize the company has been savvy enough to borrow at low US rates, convert the currency into renminbi RMB (which has appreciated) and reinvest the converted currency into substantially higher rates of returns than the interest on the loans. The result in the last quarter was a profit in investment and other income of slightly greater than 4.7 million dollars.
The end result of the increases in gross profit and investment income for ACTS in the current quarter will be a substantial increase in net income; although the increase in net income will be slightly mitigated by increases in R&D. Overall the current quarter should provide the company with their highest quarter of net income since 2008 and that is likely to propel the price per share upward looking forward.
ACTS is Not an Reverse Merger
It is important to note that ACTS was IPOed in 2005 on the Hang Seng; it trades in the US in the form of ADR. The current epidemic of fraudulent Chinese companies has almost exclusively been a function of companies which have come to market as reverse mergers. Reverse mergers are much easier to bring to market and come under considerable less regulatory scrutiny than an initial public offering (IPO).
Additionally, ACTS has a top auditor in the form of Deloitte and has never provided sales or income which appeared to be unreal in nature. Quite the contrary has been the case; the companies' numbers have been dismal in recent years. Declining revenues have largely been a result of steadily dwindling MP3 sales which have historically been the major source of the companies' sales. The company has been highly dependent upon the non-Apple portable media player market which has experienced steady decline in popularity and profit margin in the last several years.
Valuation
As of the last quarter ACTS has approximately 2.79 per fully diluted share in cash and short term investments when all liabilities are deducted. That places the company at about .73 times cash and short term securities. ACTS has a fully diluted book value of around 3.77 dollars per share and currently trades at just over two dollars a share. That represents around .54 times book value.
The company is slowly but steadily buying back shares as market conditions allow. Every share which is repurchased at current levels results in an increase in tangible book value per share in addition to increasing the discount to cash and short term investments per share.
Bear in mind that ACTS is now profitable in terms of net income and significantly improving operational results. However the company is trading as if it was draining equity on a steady basis. Quite the contrary is true, despite significant decreases in revenues and operational profitability per share since in the past several years, ACTS has increased book value per share in every years since its 2005 IPO.
Industry: Semiconductor - Specialized
Avg P/E | Price/ Sales | Price/ Book | Net Profit Margin (%) | ||
12/10 | 2614.00 | 26.00 | 0.57 | NA | |
12/09 | -90.90 | 25.16 | 0.66 | -23.6 | |
12/08 | 50.20 | 8.49 | 0.45 | 27.5 | |
12/07 | 59.30 | 17.97 | 1.33 | 44.3 | |
12/06 | 61.50 | 25.16 | 3.41 | 43.8 | |
12/05 | 51.20 | 25.57 | 5.22 | 49.2 | |
12/04 | NA | NA | NA | 46.3 | |
12/03 | NA | NA | NA | 2.4 | |
12/02 | NA | NA | NA | -365.7 | |
Book Value/ Share | Debt/ Equity | Return on Equity (%) | Return on Assets (%) | Interest Coverage | |
12/10 | $3.80 | 0.00 | 0.1 | 0.1 | NA |
12/09 | $3.64 | 0.00 | -3.8 | -3.6 | -351.7 |
12/08 | $3.57 | 0.01 | 9.0 | 8.5 | 4233.0 |
12/07 | $3.06 | 0.01 | 19.9 | 18.1 | 431.2 |
12/06 | $2.43 | 0.00 | 35.7 | 31.4 | 474.3 |
12/05 | $1.52 | 0.02 | 56.4 | 46.4 | 934.9 |
12/04 | $.39 | 0.00 | 85.1 | 58.6 | NA |
12/03 | $.05 | 0.00 | 3.4 | 2.7 | NA |
12/02 | $.02 | 0.00 | -36.3 | -31.7 | NA |
It should be noted that the current valuation of .54 book value is near the companies' historical low price to book ratio recorded in late 2008 and early 2009.
Intellectual Properties
The company holds the following intellectual properties:
As of December 31, 2010, we held 81 issued patents and had 107 pending patent applications in PRC, nine pending patent applications in the United States and nine pending patent applications in the European Union. We intend to continue to assess appropriate occasions for seeking patent protection for those aspects of our technology that we believe provide significant competitive advantages. In addition, we owned 18 registered layout designs and 22 registered computer software copyrights in the PRC.
We held 26 registered trademarks and 40 pending trademark applications in the PRC as of December 31, 2010. In addition, we also held four registered trademarks in Hong Kong, four in Taiwan, four in the United States, four in the European Union, three in Australia, three in Russia, three in Korea, three in Singapore, two in Japan, three in Canada and one in India as of December 31, 2010. Our trademarks include Actions, Actions Semiconductor, and Actions Semiconductor logo. These trademarks remain valid while we continue to use and renew them.
We have established an intellectual property rights, or IPR, department which serves our entire organization and undertakes patent application, trademark registration, integrated circuit layout design [registration?], software copyright registration, and related legal affairs. As of December 31, 2010, we had seven in-house intellectual property legal counsels and engineers who worked closely with all departments including marketing, research and development and had extensive connections with external law firms and intellectual property offices.
Source: 2010 Annual Report
Reason for Mispricing
The opportunity to purchase shares of ACTS at a substantial discount to it cash and short term is investment is likely due to the following factors:
1) General mistrust in Chinese companies due to rampant fraud
2) Declining revenues and margins in recent years
3) General pessimistic market conditions
ACTS could be classified as a broken IPO; the company was brought public in the Fall of 2005 at 8.00 per share.
The following table depicts the drop off in sales and EBIT which along with other factors has precipitated the sell off:
Income Statement - 10 Year Summary (in Millions)
Sales | EBIT | Depreciation | Total Net Income | EPS | Tax Rate (%) | |
12/10 | 37.59 | 1.06 | 3.83 | 0.38 | 0.0 | 39.92 |
12/09 | 44.14 | -9.3 | 4.91 | -10.4 | -0.02 | 0.0 |
12/08 | 95.13 | 30.17 | 5.28 | 26.12 | 0.05 | 12.04 |
12/07 | 116.63 | 54.01 | 3.91 | 51.64 | 0.1 | 4.08 |
12/06 | 170.23 | 80.61 | 1.98 | 74.56 | 0.14 | 7.42 |
12/05 | 149.62 | 73.06 | 0.7 | 73.61 | 0.15 | -0.72 |
12/04 | 57.26 | 26.51 | 0.24 | 26.49 | 0.06 | 0.09 |
12/03 | 5.56 | 0.13 | 0.14 | 0.13 | 0.0 | 0.0 |
12/02 | 0.14 | -0.5 | 0.05 | -0.5 | 0.0 | 0.0 |
Balance Sheet - 10 Year Summary (in Millions)
Current Assets | Current Liabilities | Long Term Debt | Shares Outstanding | |
12/10 | 286.23 | 15.53 | 0.0 | 427.7 Mil |
12/09 | 285.21 | 11.9 | 0.0 | 450.6 Mil |
12/08 | 306.09 | 16.95 | 0.0 | 485.5 Mil |
12/07 | 285.04 | 25.81 | 0.0 | 508.2 Mil |
12/06 | 237.67 | 28.65 | 0.0 | 516.0 Mil |
12/05 | 158.59 | 28.01 | 0.0 | 516.0 Mil |
12/04 | 45.16 | 14.05 | 0.0 | 480.0 Mil |
12/03 | 4.86 | 0.97 | 0.0 | 480.0 Mil |
12/02 | 1.58 | 0.2 | 0.0 | 480.0 Mil |
Summary
Actions Semiconductor (ACTS) offers value investors a chance to buy a legitimate company at a 27% discount to its cash and short term investments less total liabilities. Such net/net propositions are extremely rare and are usually a result of a failing company which unwilling to liquidate its assets.
ACTS does not appear to be failing; instead it appears the company is returning to operational profitability. Additionally, the company is currently profitable due to its investment returns which are a function of the companies' large cash horde.
The recent upward guidance issued last week should ensure that ACTS will experience its best quarter in three years. The recent improvements in operational results are likely to propel the stock much closer to its intrinsic balance sheet value.
Disclosure: Long ACTS
