ACTS is a net-net trading at 0.57x P/NCAV (price over net current asset value) and 0.40x P/NTA (price over net tangible assets). 0.40x P/NTA is a new historical low for ACTS; its previous historical low was 0.48x P/NTA in 2008. ACTS is also a net cash stock, with net cash and short term investments representing 175% of its market capitalization. According to the most recent 6-K filed for the third quarter of 2012, current net cash comprises $40 million in cash and cash equivalents, and $173 million in trading securities and marketable securities, which are principal-guaranteed by China’s state-owned financial institutions.
Thirty three million dollars of cash and $186 million of marketable securities are the key contributors to the net current asset value of $189 million as at Dec. 31, 2011. The values of receivables and inventories are insignificant at $3 million and $7 million respectively. The marketable securities are money market deposits and trust financial products purchased by ACTS from banks or independent financial institutions in China, which have maturities anywhere between three to twenty-four months when purchased. According to management, the money market deposits are foreign currency deposits with principal that is protected. The trust financial products are investments in individual funds or in pools of funds held by financial institutions, which use the funds raised to independently manage a pool of various assets of which the underlying investments are debt instruments.
Financial And Business Risks
ACTS is in a net cash financial position, with gross debt-to-equity ratio at a mere 4.3%. Since its IPO, ACTS' debt-to-equity ratio has never exceeded 5%. With $12 million interest income earned on $219 million of cash and short term investments, the cash yield is 5.4%. The risks of fake cash are mitigated by a low gearing, a reasonable cash yield and an active share repurchase program.
ACTS does not own or operate a semiconductor fabrication facility. It relies on third-party contractors He Jian Technology Co. and United Microelectronics Corp. to manufacture almost all of its mass-produced SoC products. By outsourcing demand, it does not have as tight control over production as its competitors, losing the flexibility to add capacity at will and benefit from higher utilization levels.
ACTS borrowed $12 million (USD) in fiscal year 2011 to invest in Chinese short-term investments to implement its own US carry trade taking advantage of low US interest rates. Although the amount borrowed is relatively insignificant, I am negative on company management speculating on movements in interest rates.
Business Quality and Capital Allocation
ACTS is the market leader for non-Apple portable audio products and portable video players with gaming and video capturing. For the non-Apple market, it claims to own 40% of the overall market share and 60% of the global OEM market share. OEM customers include Newman, Onda, Unibit, Aigo, Disney, iRiver, Coby and LG. It has also entered the growing tablet market with the launch of a 1.2GHZ CPU-based solution for 7-inch tablets in the second quarter of 2012. Over the past five years, ACTS achieved a five year average ROE of 5.3% and seen its book value per share grow by a CAGR of 10.6%.
ACTS has a long term share repurchase program, with its current shares outstanding representing 80% of its shares outstanding five years ago. As of Sept. 30, 2012, the company invested $44.8 million in the share repurchase program, buying back 19.7 million ADS shares in total since 2007. In August 2012, the board of directors approved an increase of 10 million ADS shares to the existing buyback program.
The directors and senior management do not own any shares of ACTS. This probably explains why no dividends were paid out despite the huge cash hoard. The aggregate amount of salaries and bonuses paid to directors and executive officers during the year ended Dec. 31, 2011 was approximately $1.15 million (USD), representing 38% of fiscal year 2011 net income of $3 million (USD).
During 2011, options to purchase 15,000 ADS stocks were granted to directors and executive officers. The per share exercise price of the options was $1.40 per ADS, and the expiration dates of such options ranged from May 20, 2014 to May 20, 2015.
Downside risks are limited with ACTS trading at a historical low of 0.40x P/NTA and at slightly more than half of its net cash value.
The author does not have a position in any of the stocks mentioned.