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A Walk in the Park with Cypark Resources Berhad (5184)

Lately, I have been searching for a company which has good profit margins, a business model which is non-conventional (i.e., not manufacturing, banking, plantation, and trading in nature), and resilient to external market shocks. I hope I have found the right company! This week I will be looking at Cypark Resources Berhad (5184). Cypark is a company that is involved with the provision of environmental solutions. It has 4 main business segments which are: 1. Environmental engineering: Provision of nature conservation and environmental improvement services. 2. Landscaping and infrastructure: Provision of landscape services, project management services, and infrastructure development. 3. Maintenance: Provision of specialist maintenance works on leachate treatment plants, landscape services for parks, and maintenance of public amenities. 4. Green technology & renewable energy: Solar panel, biogas, biomass, waste-to-energy, and other renewable energy project

Dufu Technology Corp Bhd (7233)

Dufu Technology Corp Bhd (7233) (Dufu) is a listed company on the FBMKLCI. It was established about 30 years ago on October 1987. The 3 main principal activities of this company according to its website, are:
1. Development and manufacture of precision machining components for the Hard Disk Drive industry, safety and sensor industry, telecommunications industry, and consumer electronics industry
2. Design and manufacture of precision steel moulds and stamping of parts and components
3. Provision of support services

If you are like me, a person who wants to know the split of revenue and profits in terms of business segments, you will be disappointed. This company does not disclose this information in such detail. It only discloses its revenue split in terms of geographical location as shown below in Chart 1:

Chart 1: Revenue of Dufu based on geographical location

The Hard Disk Drive Industry and its Competitors It is no secret that the global shipments for Hard Disk Drive is on a declining trend. The reason behind this is due to the decline in demand for personal computers and laptops, coupled with the increase in demand for Solid State Drives. Solid State Drive performs like a Hard Disk Drive, but retains data on interconnected flash memory chips; thus, this makes Solid State Drive quicker and more reliable compared to Hard Disk Drive.

Refer to Chart 2 and 3 below for the trend in shipments of Hard Disk Drive and shipment forecast of desktops, laptops and tablets respectively.

Chart 2: Shipment of Hard Disk Drive in millions units

Chart 3: Shipment Forecast of Desktop Personal Computers, Laptops and Tablets in millions units
In the medium-term, the Hard Disk Drive is still a viable business. However, in the longer term, the demand for Hard Disk Drive is set to decline due to the 2 factors mentioned above. As for competition with Solid State Drive, in the medium term, Hard Disk Drive is still the preferred choice for cheap and reliable data storage.

From my research on the net, it was noted that the cost per gigabyte of storage on the Solid State Drive is approximately 4-5 times the cost per gigabyte of storage on the Hard Disk Drive.

A 1TB internal 2.5-inch hard drive costs between $40 and $50, an Solid State Drive of the same capacity and form factor starts at $250. That translates into 4 to 5 cents per gigabyte for the hard drive and 25 cents per gigabyte for the Solid State Drive.

Hence, Solid State Drives s will not be replacing HDDs in the near future as it is still much more economical to use HDDs. With its economic advantage, HDD manufacturers are shifting its focus to higher capacity HDD storage – within the range of 14 – 20 terabytes (TB).

From my understanding, it is not that the personal computer sector is declining and dying. It is because the need to access the internet has been replaced by the smart phone. The smart phone is evolving into a fully functional device which enables the owner to do many things. With each new release, smart phones are getting more powerful than the generation preceding it. It enables the owner to surf the internet, is portable and easily carried around, takes amazing pictures, be used as a GPS navigator, play games, make payments, be converted into a mini desktop, etc.. These days, a smart phone cost as much as a PC, and considering the former is a necessity, the decision to purchase one usually takes precedence over a PC.

Check out Chart 4 below on the massive growth in the smart phone industry.

Chart 4: Smartphone shipments by vendors in million units

Does Dufu still have investment value?Let’s find out. On average, a hundred million HDDs are sold every quarter; although on a decreasing trend. It is not that Dufu’s revenue will vaporize overnight, but I foresee revenue growth at a potential standstill. A good way to analyse its investment value is to look at its financials.

Chart 5: Dufu Financial Statistics

In terms of revenue, revenue has grown from RM 104 million to RM 180 million in 5 years. Statistically, this is a good indication of a healthy business. Despite a decline in revenue from RM 178 million in 2015 to RM 170 million in 2016, Dufu’s revenue recorded a compounded annual growth rate of 12% from 2013 to 2018.

Chart 6: Dufu’s Financial Position

In terms of its financial position, it is healthy. All its borrowings are sufficiently covered by its cash. Hence, this is an area that should not keep investors worried. However, if there is an area of concern, it would be inventory. As Dufu is involved with the technology industry, its inventory is subject to the risk of obsolescence. This aspect is monitored in Chart 6 above, under inventories written down and reversal of inventories written down.

Final thoughts 

The Hard Disk Drive industry still ships on average a hundred million units of Hard Disk Drive per quarter and the cost of Solid State Drive technology is still much more expansive compared to Hard Disk Drive. Furthermore, Hard Disk Drive has not been rendered obsolete yet as they are still common on laptops and desktops. Based on the above analysis, Dufu seems to be a decent investment in the medium term. However, investors have to be watchful at the speed of growth in the Solid State Drive segment.

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