2024 Week 45

Trumping the manufacturers - TK Group, Ten Pao, Nameson, Crystal International, PC Partner

Written on 6th November 2024

Trump is back in the white house. Like any events of the past, it is best to be well prepared for what is most likely going to happen.

Tariffs and possibly even tougher US chip restriction!

If the companies you are invested in are not prepared for a Trump’s tariffs, maybe it is time you start thinking on how to mitigate risk and possibly prepare your portfolio for the possible scenario?

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Manufacturing stocks - into the unknown?

I have chatted about manufacturing stock on Week 40.

In that article I have broadly divided the manufacturing into a few categories.

1. parts manufacturing (high end)

2. capital equipment manufacturing

3. product/customer led manufacturing

4. specialised product manufacturing

Category 1 which include TK Group which manufacture high end parts of products which are meant to be integrated and then exported.

The final customers may have been stocking up goods to be assembled and export since 2024 Week 40 when Trump presidency looks like a possibility.

Since the final customers are stocked up, they will begin to look for alternate manufacturing sites to move their supply chain out of China. Since most of these high end parts cannot be reliably manufactured out of China, it also means that the distributors of these final products will be slapped with tons of tariffs.

There is a need for these tariffs to be “subsidised” by someone and that meant that all the manufacturer and assembly margin will be “transferred” to the distributor and subsequently to the US government. These “tariff” costs will feed into the final products with all the worldwide consumers subsidising to close the US deficit gap.

We had enjoyed the economies of scale of Chinese manufacturing and now we will have to face the dis-economies of scale from the American tariffs. Four years is too short to rejig a high technology supply chain.

So expect lots of pain in between for these set of manufacturers.

Category 4 companies like Ten Pao benefit from their ability to move abroad easily. For example, Ten Pao has the capability to manufacture in Mexico and Hungary, serving both the US and Europe market respectively. Ten Pao’s years of preparation should have serve them well?

The problem is what if Trump would slap tariff on Chinese goods originating from Mexico?

If that happens, Ten Pao may need to go one step further to set up a plant in the US. My belief is that these companies will finally realise that in they will need to set up a plant where the demand originate from.

Going forward, one cannot escape tariffs while trying to arbitrage human and capital cost. US is frustrated with budget deficit and this may just become a multi-decade trend of on-shoring manufacturing back into the US again.

On a side note, it seems that TK and Ten Pao share price seems to be holding up quite well due to the potential dividend yield of 10% (normal + special)? Maybe, the manufacturing sector will not be hit as hard as I had predicted.

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Garment Manufacturing - let it grow?

There is another form of manufacturing which I usually try to avoid.

This industry is the first to start up in China and possibly the first to move out of China. The reason is that there is minimal skills required to put together a piece of clothing.

Since the opening of China, there has been a proliferation of various types of garment manufacturers. As they have gotten bigger, some of the better operators started to specialise on different set of product range.

The few operators who are big and profitable include

1. Shenzhou International Group Holdings Limited (2313)

   • knitwear

   • sportswear

   • casual

   • lingerie

2. Crystal International Group Limited (2232) 

   • lifestyle wear

   • denim

   • intimate

   • sweater

   • sportswear

   • outdoor apparel 

3. Eagle Nice (International) Holdings Limited (2368) 

   • sportswear

4. Nameson Holdings Limited (1982) 

   • knitwear

Crystal and Nameson have done very well and their stocks have mostly doubled from the 52 weeks low. 

Most of these players are in the high volume and low mix production. Increasingly, the international brands (due to the pressure from fast fashion players like Shein) are adopting the high mix low volume form of production. 

One such consolidator of high mix low volume form of production is Lever Style. 

Lever Style is involved in the design, production, and trading of garments. Its products include seamless-bonded, activewear, performance wear and outwear, sweaters, denim, bottoms, soft wovens, shirts, cut-and-sewn knit, fashion outwear, leather, and tailoring products for men, women, and kids. 

Instead of operating factories, Lever Style operates as a two way platform marketplace linking the brand names to the factories. Lever Style acquires the customers, works with them to come up with the template for the manufacturing and quality control and then works with their manufacturing partners to produce the goods. 

• For the brand owners, they know that they are dealing with a reputable party who is able to go from design to manufacturing different types of apparels across factories throughout Asia.

• For the factories, they do not need to worry about setting up a sales and design team to engage the brand owner, able to focus on production efficiency while being assured of constant work and payment from Lever Style. 

• For Lever Style, they are able to help their customers navigate the geopolitical risk by using their associates factories throughout Asia.

Their business model allows them to take advantage of two trends,

1. Trump’s tariffs,

2. The move towards high mix low volume manufacturing. 

The main risk is that Lever Style usually works with the smaller brands which will be more affected by any economic downturn. I am sure most of you would be hard pressed to explain the difference between the brands they manufacture for. 

In their latest quarter, Bonobos- the largest customer of the Group which accounted for approximately 16.2% of the revenue of the Group for the year ended 2023 fell into financial difficulties was “sold” to a consortium of new owners led by WHP Global. That meant that Lever Style most likely took a haircut on their receivables and pricing to keep their “new” customer. 

Lever Style usually uses a mixture of organic and inorganic growth to power their growth. When times are good, they will press hard on the pedal to sell. When times are bad, they will go inorganic and start to acquire customers through the acquisition.

They have set an aggressive growth target of doubling every 3 years. This is a tough target to hit but I am betting that Stanley and his team may just have the plan to be able to do just that. 

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Graphic card manufacturing - Best in Singapore and possibly Batam?

PC Partner has finally been approved to list in Singapore…

with some “conditions” to be fulfilled.

That explained why the eligibility to list took such a long time…

PC Partner is a maker video graphics cards for personal computers. If you want to get your hands on the high end video graphic cards, you can only buy that from a handful of companies.

The listing exercise on the SGX allows PC Partner to be more “Singaporean”. This shift in “positioning” is required as their business requires them to have access to the highest end Nvidia chips.

That is one way to de-risk your manufacturing business…

On a operational basis, PC Partner is already ramping up hiring in Batam Indonesia and some of the production line has already got started a few weeks ago.

Their listing on the SGX should be well received by the Singapore investing community. The company is flushed with cash and has shown to be comfortable in sharing their spoils with their shareholders. A 7 % dividend yield should be highly attractive to the Singapore market.

Caveat emptor is that there are still “conditions” to be fulfilled…