There's good news out of China this morning: Shares of Shenzhen-based electronics manufacturer Nam Tai Electronics (NYSE: NTE) are up 7% thanks to an excellent earnings report.
Unless you subscribe to our Global Gains newsletter, you may not be familiar with Nam Tai. That's OK -- the stock market in general has passed this company by for many years. The stock is down 80% over the past five years even after today's price pop, and it stopped paying dividends in late 2008. No, that announcement sure didn't help the share price any.
But it was a wise decision nonetheless. Nam Tai is a small company while local giant Hon Hai Precision Industry employs more than 800,000 workers across the globe, including about 420,000 at a huge factory complex right next door to Nam Tai. Hon Hai is better known under its Foxconn brand, through which it assembles gadgets such as smartphones and computers for Apple (Nasdaq: AAPL), Motorola (NYSE: MOT), and other global technology titans.
Shenzhen's location, about as close as you can get to Hong Kong without leaving China proper, makes it an attractive locale for high-tech businesses in need of cheap Chinese labor. So Nam Tai redirected some of those old dividend payments into capital expenses building more factories now. If you want to play with the big boys, you have to invest in your own operations. Save the dividend payments for later.
And Nam Tai has its sights set on worldwide business. The company's stated goal is to extend itself as a "China-based provider of electronic manufacturing services to major OEMs," building on existing relationships with brand-name customers such as Sharp, Sony (NYSE: SNE), and Texas Instruments (NYSE: TXN).
The second quarter of 2010 shows some progress toward that ambition. Sales grew 12% year over year to $114 million, and earnings per American Depositary Receipt rose from $0.01 to $0.07. Cost-cutting efforts and a larger customer base overpowered slow sales of Nam Tai's cell phone accessory lines and self-branded home entertainment devices.
The company is on an upward path despite some major headwinds. I don't think Nam Tai will get out of the currently unprofitable accessories business, but I do believe that this weakness will turn into strength once consumers in China and elsewhere start spending their disposable income on optional trinkets like Bluetooth headsets again.
Nam Tai is a long way from challenging Hon Hai or Flextronics (Nasdaq: FLEX) today, but then the stock toils in almost complete obscurity and very close to the breakeven point -- two factors that make the stock difficult to pin down at a glance.
I look at Nam Tai and see a turnaround story in progress, just waiting for a consumer-driven catalyst. What do you see? The company essentially trades at cash, so other investors aren’t giving Nam Tai’s underlying production business much love. The comments box below is dying to hear your take.
