Tech Market WatchBy Perry Wu
Nam Tai is an example of a successful technology company operating in China, combining the best of cheap labor on the mainland, Japanese manufacturing expertise and hard cash from overseas sales. The company is now listed on the New York Stock Exchange and provides a rare showcase of a well-run Chinese company worth investing in.

Started up in 1975 by M.K. Koo in Hong Kong, the company early on became a manufacturer of electronic calculators for Texas Instruments and Sharp Electronics. It was one of the earliest companies to capitalize on the opening of the Chinese economy by moving its production to the mainland in 1980.

Seeing the value of hiring world-class expertise in electronics manufacturing, the company began wooing Japanese electronics executives to take senior positions at the company. To this day, the Chairman of the company is Japanese, Mr. Tadao Murakami.

After undergoing several changes through the years in the electronics products that it manufactures, the company today is mainly a producer of two types of products, LCDs and telecom components. For 2003, LCD accounted for 58% of sales and telecom components accounted for 31%.

Although Nam Tai has issued stock options, it has appeared to have done so responsibly. Over the past three years, its options have not exceeded 5% of the company's outstanding shares. Accordingly, Nam Tai's diluted earnings per share is US$1.07, which is little different than the basic earnings per share of US$1.09.

While other companies that capitalize on the inexpensive pool of labor available in China mainly concentrate on one export market, for example the U.S., Nam Tai's exports are very well dispersed geographically. No one region of the world accounts for more than one-fourth of the company's sales. Indeed, domestic sales in China are the company's fastest growing sales region.

Nam Tai also deserves kudos for doing some good tax planning; this is indicative of a company that is professionally managed. By being a BVI-incorporated company, it has eliminated any home country income tax. Then, by taking advantage of local Chinese tax breaks available in such cities as Shenzhen, it has reduced its PRC tax to nearly zero for the next few years. The only taxes that the company appears to be

currently subject to is the Hong Kong profits tax, but even this is barely material. Accordingly, the company's effective tax rate for 2003 was a miserly 1%.

There is a lot of truth in the saying "profit is opinion, but cash is fact." Unlike so many other tech manufacturing companies operating in China, Nam Tai has a history of actually paying out cash dividends. From a cash dividend of US$17 million in 2002, the company more than doubled that to US$37 million in 2003 (this included a "special" cash dividend in 2003). So buying this stock can give an investor a chance at an income stream as well as capital appreciation.

It is heartwarming to see the low levels of leverage that Nam Tai uses. Its total liabilities at March 31, 2004 were US$76 million but its cash balance was US$63 million. Essentially, the company currently has the cash to repay most of what it owes. It is just the sort of low levels that should allow the company to survive even large systemic shocks to its home market.

Nam Tai is not only conservative about its liabilities, it also seems to realize that capital expenditures have to be ruthlessly controlled. Capex actually halved between 2001 and 2003.

With all these positives, there are some nagging negatives about Nam Tai. The company decided to transfer its share listing from the NASDAQ to the New York Stock Exchange in 2003, which is significantly more expensive. The company explains that this was done to "reduce the cost of capital". That is specious reasoning as cost of capital has nothing to do with where a company's shares are listed–the real reason is that it probably gives the executives of the company a little more prestige.

This need for prestige also shows when the company chose New York's very expensive Peninsula Hotel as the site for its annual shareholders' meeting this year. Although the costs for this meeting are probably not material in relation to Nam Tai's profits, it is things like these which show the company is not minimizing costs at every opportunity.

Nam Tai is an example of a professionally managed company that will provide better shareholder returns than most other China-related companies over time. It is unclear if that is a good commentary on Nam Tai, or just a commentary on most China-related companies.

About the author:
Perry Wu is a writer and correspondent for and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.


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