My 5 simple steps will lead me to simple but effective value investing. My way to minimise the risk and maximise the gain.
Step 1: Check the PNL. Profit? Potential turnaround to profit?
Aim the bull: Profit growing with higher sale mainly from better margin automotive product sales pipeline. As automotive product required more stringent quality level, therefore is not easy for competitors to come into the business to share the cake. As D&O already successful penetrate into this market, this will be sustainable income for next few years.
Score : 1
Step 2: Check the cash flow. Where is the money generate? Where is the money go?
Aim the bull: After cash received from Epistar (big LED coy) to join development together, company cash level improved but still is not net cash company. Cash mainly spend on machines and R&D project. My thinking, R&D is very important spending to move company forward. If company is keeping at same position is equal to waiting to game over.
Score: 1
Step 3: Check the Balance Sheet. Is it only left the shit (e.g debt)? Cash status? Retained earnings for potential bonus issue? NTA vs price? Fair value vs price vs NTA?
Aim the bull: Price trading at above NTA. Cash and debt at manageable level. Mainly PE play. The continue profitable and positive cash flow is under monitoring by Aim The Bull.
Score:0
Step 4: Check the price status? Which wave? Uptrend? Downtrend? Consolidation? At peak? Measurement of margin of safety?
Aim the bull: Still in downtrend process. Price now trading at 0.30. Worth to close monitoring. My way is don't chase the high or the peak. Go search any stock with high chance to rebound. D&O can be the next, and need a better financial result to trigger it rebound.
Score: 0.5 as I'm not sure 0.30 is bottom.
Step 5: How is the outlook of the existing business and any potential sales pipeline?
Aim the bull: I like Green tech business. I monitor D&O because the automotive LED business outlook is very promising as now many new cars start to change conventional car light to LED light due to its lower power consumption, therefore this is a sun rise business and with attractive margin.
Score: 1
If score 1 or 2 points...forget it
If score 3 points...monitor closely
If score 4 points...collect slowly
If score 5 points...full force...sai lang
Overall 3.5 points...the risk is the price might not bottom reaching yet and fluctuation of techno business cycle.
Higher profit and tax recoverable
Take note of high goodwill value with risk of write down as a loss, cash mainly from. proceed from share subscription by Epistar. High inventory level also risk of material scrap if business slow down. High borrowing but manageable as sales is increasing with profit. Remember sales increase without profit will damage cash flow.
Higher spending in R&D to avoid the company outdated. Cash from operating still in red, manage to get new fund. I forsea if the automotive product mix ratio increased will lead to better margin and better cash as well. Remember company must generate profit with positive cash flow. Do not trap by high profit but cash in red.
