Description

Da HAAM e-TEC Co., Ltd. (009280)

Dahaam Etec is worth 66% more than its current trading level and has little to no downside risk.  The current MV (3.8mm shares excluding the treasury stock) is $164.8mm (W930=$1) at current trading level of W40,350/share.  Yet the company has no debt, $96.5mm in cash and marketable securities, and has a stable (almost certainly growing) after tax cash flow of $14.1mm/year.  To value the company we do a simple sum of the parts valuation.

 

 

Base Case Valuation

 

$mm's		2006	NOPAT	NOPAT	Cash & Marketable	Total
	Business	NOPAT	Multiple	Value	Securities Value	Value
Dahaam Etec	Auto Parts Manufacturer (electronics)	3.3	7X	23.1	36.4	59.5
Dahaam Net	27 Hole Public Golf Course	9.7	15X	145.5	60.1	205.6
Other affiliates	4 small companies	1.1	7X	7.7	0.0	7.7
Total		14.1	13X	176.3	96.5	272.8
MV						164.8
% Upside						66%

 

There are seemingly 4 clear reasons why this stock is so cheap right now:

 

1. It is a Korean company (that entails any handful of “Korean discounts” that people place on Korean companies).

 

2. 62% of the cash and marketable securities are held at a wholly owned subsidiary so they are “hidden” by the equity method accounting that Korean companies use.  You can only see subsidiary financials on a year end basis so our cash and marketable securities numbers are based off of year end financials for the wholly owned subsidiary and quarter end financials for the parent company.

 

3. “Core" business is pretty lousy and good golf course business only shows up as equity method gains.  Therefore, if one just focuses on sales and operating profit the real profitability of this company is hidden.

 

4. The stock is illiquid (it trades roughly $30k/day).  Although the MV is $153mm, the free float is quite low because the CEO owns over 50% and a Korean value fund investor owns about 10%.

 

5. The Company receives very little attention even compared to other Korean companies.  There is no IR, CFO doesn’t speak English, no analyst coverage, and the business is not located in Seoul.  In short, no one knows much about the company or cares to look beyond its apparently lousy parent business of making cassette, CD and DVD players for cars.

 

 

 

 

 

Businesses

 

Dahaam Net:  The Golf Course Business – 99.75% owned subsidiary

 

2006	Won (B)
	Revenue	COGS	GP	SGA	OI	Taxes	NOPAT
Green fees	14.00	2.30	11.70
Food & Bev	1.83	1.30	0.53
Cart Rentals	2.13	0.44	1.69
Other	0.20		0.20
TOTAL	18.16	4.04	14.12	1.74	12.38	3.40	8.97
						US$(mm's)	9.65

 

Dahaam Net’s Joongwon course stands out because almost all courses in Korea are membership-only, which makes golfing in Korea expensive (even compared to the US where golf is hardly cheap).  The Seoul area, which includes over 20 million people, has an insufficient supply of land to meet the golfing demand of people in Seoul (at least within hours of Seoul).  Furthermore, tough environmental permitting further restricts additional golf courses from being built.  Consequently, most courses that are built require up front membership fees to provide both capital for the project as well as to economically justify the development.  The CEO of Dahaam Etec purchased the land in 2004 for approximately W33.5B (book value of land) and spent an additional W12B to build out the course.  I don’t know the fair market value for the land today, but given the tremendous land appreciation in Korea during the last few years, I would assume the land appreciation is significant.

 

The low cost and high quality combination of Joongwon’s golf course is why it is currently able to require “members” to post a W105,000 deposit (deposit is held by the website provider) to make reservations over the course’s website.  Currently, over 60,000 golfers have made this deposit.  This website reservation system is one reason Joongwon is now able to selectively raise prices.  You can access the website at http://www.njoygolf.net/home/index.html.  One thing you will notice is that the website also shows information about Sunhill.  This is a members-only facility that is also owned by Dahaam Etec’s CEO.  The only business connection that Sunhill has with Joongwon is that Joongwon saves some system costs by sharing the costs of this reservation system with Sunhill.

 

Thanks to the lower cost and proximity to Seoul (yes, 2 hours is “close” by Seoul standards), the course runs at full capacity on any given weekend from spring to fall.  Peak capacity is about 640 people a day.  I played on a rainy Saturday in May and the course was still running near capacity. (I blame these rainy and gusty conditions for my score slightly crossing the century mark).  Caddies explained to me that they typically see about 60-160 “teams” per day, which equates to 640 max players if you assume 4 per team (they will not let a team go out with less than 3 players).  So at W100k per player, they can make approximately W64mm/day or W23B/year if it was a perfect world.  As it is not, the 27 hole course gets more like 340 playable days and roughly 300 players during weekdays vs. >500/day on weekends. 

 

All operating metrics improved from 2005 to 2006, but since the course opened around March 2005 comparing the two years isn’t a fair comparison.  More importantly the CFO told me last month that he expects the course to make an additional W1.2B in golf revenues in 2007 vs. 2006, which should almost entirely contribute to pretax earnings.  The General Manager of the course also made a similar prediction.  He was basing his prediction on the fact that he was selectively raising prices on the most popular course times now that he had more data to better manage pricing schemes.  Given the golf courses’ solid supply/demand dynamics and its excellent cash flow nature we are using a multiple of 15X 2006 NOPAT for our valuation.  This values the golf course at $146mm, which is almost equal to the current market value of the company.

 

Dahaam Etec:  The Auto Parts Business – Parent Company

 

2006	Won (B)
	Revenue	COGS	GP	SGA	OI	Taxes	NI
Auto	33.38	25.91	7.47	3.24	4.23	1.16	3.07
						US$(mm's)	3.30

 

The business for which Dahaam Etec is actually known (and, therefore, part of the reason why it is so undervalued) is one which manufactures parts for cars.  It is not a good business, but probably not as bad as it looks either.  More specifically, they make audio players for cars such as cassette decks and CD players.  Recently, they have also started making DVD players and navigation systems.  The company’s revenue mix by product is 36% cassette players, 0% CD players and 64% DVD players.  They produce these products for a handful of different automakers.  55% of their revenues come from sales to major export customers in the US, Russia and Southeastern Asia as an OEM producer. The other 45% of revenues come from sales to Hyundai and Kia (both Korean).

 

As the CD and cassette products were becoming obsolete, the profitability of this business declined sharply from 2002 to 2005.  However, the introduction of DVD players and the reduction of costs by outsourcing more to China has stabilized the business and even led to a 47% increase in operating income in 2006.  According to the CFO, the continued mix shift to DVD players will create a gross profit improvement of W0.5B in 2007.  He also expects DVD gross margins to improve 200-400 basis points resulting in another W0.5B improvement if the company achieves the low end of its range.  This improvement will be achieved by moving more manufacturing to China.

 

In addition, there is some chance they can grow revenues from DVDs since they only supply about 5% of Hyundai’s DVDs compared to 85% for cassettes.  The reason they supply such a low % of Hyundai’s DVDs is because they only sell a high end model (one that also includes mobile tv for Korean cars).  The current supplier of the low end DVDs is a Japanese company, which is very unlikely to make the required investment to start building the high end model given the technology could only be applied to Korean DVDs.   Consequently, the current DVD business seems to be safe and the major question is whether or not Dahaam will be able to get a piece of the low end DVD business.

 

The improvements the company is looking for in 2007 are probably best characterized as goals rather than expectations, but the important thing is that the business has stabilized.  Since we still don’t believe this is a great business we are using a multiple of 7X 2006 NOPAT for our valuation.

 

 

Other affiliates:

 

Won (B)				2006	2007 Expected
EQUITY METHOD SUBSIDIARIES	Business	% ownership	BV	NOPAT*	NOPAT*
Jefar Tech	CRT equipment	78%	2.7	0.1	0.0
Tienjin Shinhan Prec. Co., Ltd.	Audio assembly	100%	3.5	0.9	1.0
Tienjin Shinhan Part. Ltd. Co., Ltd	Audio assembly	100%	1.9	0.0	0.2
Je Seng Construction	Golf course maintenance	79%	1.1	0.0	0.1
Total			9.2	1.0	1.3
			US$(mm's)	1.1
*Dahaam Etec's share of NOPAT

 

The other 4 equity method affiliates owned by Dahaam Etec are somewhat negligible, and, therefore, admittedly I haven’t applied much rigor to my research into them.  Speaking with the CFO, I confirmed that (a) they are debt-free (b) they are not losing money and (c) there are no major conflicts of interest created by their ownership. 

 

The CRT equipment business is the former parent company of Dahaam Etec that was run by the CEO’s father.  The audio assembly businesses are simply Dahaam Etec’s way of controlling part of the supply chain in China for their DVD manufacturing business.   The golf course maintenance business exists principally to serve Joongwon and is run by family members of the CEO.

 

 

Detailed Breakdown of Cash & Marketable Securities

 

Below is a chart that breaks down the cash and securities held by Dahaam Etec and Dahaam Net.  Dahaam Etec’s financials are from 3/31/07.  Dahaam Net’s financials are from 12/31/06 because subsidiaries in Korea only put out annual financials.  The “equity securities under the equity method” are not being valued here because they show the company’s investment in its subsidiaries, which were valued above.  We are also not including the company’s $3.6mm of investments in private companies because they can’t easily be valued even though they almost certainly provide some additional upside.

 

Won (000's)
Dahaam E-Tech	3/31/2007
Cash and Cash Equivalent	13,792,200
Short Term Investment	10,479,691
Held-to-Maturity Securities	30,756
Government Bond
Within 1 year	191
1~5 years	30,370
5~10 years	195
Available-for-Sale Securities	12,889,136
Marketable Securities
KOCREF No. 7  (086720)	6,320,000
KOCREF No. 8  (090540)	3,261,200
Securities without Market Value
Pochul Tienjin Steel Process Co., Ltd.	195,134
On Se Telecommunication	-
Korea Yellow book	9,543
Wiz Tech	-
Tienjin Shinhan Part Ltd. Co., Ltd.	-
Jien Net	731,600
Zenia	1,047,900
Shenzhen Shinhan Prec. Ltd. Co.	-
Oyren Corp	-
Korea Guro Cable TV Corp.	1,322,760
Others	1,000
Equity Securities under Equity Method	113,813,384
Dahaam Net	104,649,934
Jefar Tech	2,704,087
Tienjin Shinhan Prec. Co., Ltd.	3,475,855
Je Seng Construction	1,133,183
Tienjin Shinhan Part Ltd. Co., Ltd.	1,850,324
Long Term Financials	7,000
Total	151,012,167
Cash and Marketable Securities (Won 000's)	33,890,847
Cash and Marketable Securities ($mm)	36.4
Private Investments (Won 000's)	3,307,937
Private Investments ($mm)	3.6

 

 

Dahaam Net	12/31/2006
Cash and Cash Equivalent	33,149,593
Short Term Investment	1,214,000
Held-to-Maturity Securities	102,680
Government Bond
Within 1 year	14,605
1~5 years	88,075
Available-for-Sale Securities	21,466,801
Marketable Securities
KTF	-
Kang Won Land	-
Han Jin Shipping	396,000
Beneficiary Certificate
J-Index Fund	1,062,579
Private Fixed Income Fund (Ashmore Investment)	10,050,835
Merrill Lynch Japan Fund	4,978,693
Fidelity Japan Fund	4,978,694
Equity Securities under Equity Method	0
Long Term Financials	0
Total	55,933,074
Cash and Marketable Securities (Won 000's)	55,933,074
Cash and Marketable Securities ($mm)	60.1
Private Investments (Won 000's)	0.0
Private Investments ($mm)	0.0

 

 

Company’s Use of Cash

 

The company currently has a reasonable divided yield of 2%.  However, from talking to the company it is clear the CEO prefers to use the remaining earnings and current cash and marketable securities for other investments over returning that capital to shareholders today.  For those of you that are not familiar with Korean companies this is generally how most Korean companies allocate capital.  Even though we would prefer the company to use this excess capital to buy back stock at the current price the CEO’s track record for making good investments (such as building the golf course in 2004) gives us comfort that he will invest the money wisely.  The CEO has also said that he is open to suggestions on how best to use the cash and is willing to take on leverage (assuming the company is able to put to work its current level of cash) to create a more optimal capital structure.

 

 

Summary

 

In Dahaam Etec you are paying $164.8mm for $96.5mm in cash and marketable securities and $14.1mm of slowly growing NOPAT.  You can look at this investment on any financial metric you choose and at the end of the day the result is going to be the same.  This stock is very cheap.  Considering the large amount of cash and the steady nature of the golf business it seems extremely difficult to see any downside in this investment unless the CEO squanders away all of the cash in the company and golf falls out of favor in Korea.  With the CEO owning 50% of the company it is clear his incentives are not to make a bad investment.  Furthermore, his one major investment, Dahaam Net, has been a major success, which gives us confidence that he will at least be able to get a normal market return with the cash even if he is not able to duplicate his previous success.  Given the golf demand/supply dynamics in Korea it also seems extremely unlikely that the golf course will experience a major drop off. 

 

 

 

Catalysts

Several catalysts are likely to play out which should help this stock reach fair value.

 

1.  Improved Earnings

a. The golf course raising prices selectively.  

b. The auto parts business continued margin improvement, and potential    additional sales to Hyundai.

c. Improved earnings from a reduction of FX losses on Japanese investments, which were created from the Yen depreciating against the Won in 2006.

 

2.  CEO investing the $96.5mm of cash wisely

(Clearly this one has the most potential to create massive upside)

 

3.  The continued re-rating of Korea

 

4.  Company picked up by analysts

 

5.  Company creating IR materials

 

Catalyst

Several catalysts are likely to play out which should help this stock reach fair value.



1. Improved Earnings

a. The golf course raising prices selectively.

b. The auto parts business continued margin improvement, and potential additional sales to Hyundai.

c. Improved earnings from a reduction of FX losses on Japanese investments, which were created from the Yen depreciating against the Won in 2006.



2. CEO investing the $96.5mm of cash wisely

(Clearly this one has the most potential to create massive upside)



3. The continued re-rating of Korea



4. Company picked up by analysts



5. Company creating IR materials