Creative Technology Ltd. (C76.SI): When the Story is Stronger than the Numbers…

There are many stocks in the Singapore Exchange, and of course out of these, there are many stocks which nobody would touch.

For the longest time, Creative Technology Ltd is one such ‘Zombie’ stock. ‘Zombie’ because it is basically a living dead stock. It is listed on the exchange but for years, it hardly registers a heartbeat (its share price oscillate around $1 from late 2015 to early 2018).

That is a far cry from the price of approx. $14.30 in Jan 2006.

Creative had at one point in its history achieved a market capitalization of more than US$1.6 billion and Creative CEO Sim Mong Woo became a billionaire at age 45.

How would you feel if you are a long-term investor of this stock?

I will probably try very hard to forget about this stock and move on. After all, the Singapore Exchange is littered with so many of these have been stocks/companies.

I know the stock is there, but I won’t touch it with a 10-foot pole. Maybe I will occasionally buy flowers to pay my respect :p… Just Joking.

The Numbers behind this Stock

Actually, I seriously doubt if many of the recent speculators of this stock have bothered looking at the past financial data of Creative.

However, just out of curiosity, I took a quick peek.

Very briefly, one can see that in general, Revenue has been trending downhill over the years (from a high of USD 737 mil in 2008 to USD 70 mil in 2017).

The net income has been negative for most years (2016 was, in fact, a good year with USD 3 mil net income). Similarly for Earnings Per Share.

Creative recently posted a second-quarter net loss of US$4.2 million for the three months to Dec 31, 2017, on a 6 percent year-on-year dip in revenue to US$20.9 million.

Free Cash Flow, on the other hand, has always been negative. I wonder how does a company even survive. I don’t call this company ‘living dead’ for nothing.

Which is probably why it is no wonder that Mr. Sim has once mentioned that (emphasis mine), ” The most important thing is to survive. I’m happy just to be able to survive”, some time back in 2017 (read here).

Interestingly, the TTM Free Cash Flow is projected at USD 35 Mil (and likewise TTM Net Income and Earning Per Share). After so many years of negative Free Cash Flow, all of sudden it spiked. From negative USD 21 mil to USD 35 mil, approx. USD 56 mil (SGD 73.69 mil) difference in a short span of time.

The share outstanding for this company is 70.33 mil. So typically for the past years, its Market Cap was approx. SGD 70.33 mil, assuming the share price was approx. SGD 1. Within a span of less than a year, the Free Cash Flow increase alone is equivalent to more than its past Market Cap??!

Below are the statistics from Yahoo Finance dated 6 March 2018.

What strikes me is not the terrible operating margin (-39%) or poor ROE (9.44%).

It is the total cash value per share. It has no debt but it has SGD 118.35 mil in cash. And that is SGD 1.68 per share. So until recently, the stock was priced below the cash value of the share itself (and the no. of shares did not fluctuate much in recent years). Book value per share was also more than SGD 1.

Anyway, a company with no growth prospect is nevertheless a zombie stock. However, the cash pile would likely explain why this company is still in existence.

Reading its recent 2017 Annual Report feels like reading an obituary. I probably wouldn’t get past the first page.

With the exception of the below portion:

In terms of Numbers, you can’t find any reasons there (for the stock price).. at least from the historical figures. From a pure value investing standpoint, one cannot find value at the current price. In fact, many of the tech firms with insane multiples also don’t.

However, if you factor in the forward earnings, it becomes a different story. It was never meant to be viewed as a value stock. The trailing PE ratio of Creative is 72.17.

However, if we look at the TTM Earnings per Share of USD 0.11 (SGD 0.14) to its Share price on 7 March 2018 (SGD 8.30), the forward PE becomes 59. Still high… but still, there are crazier PE ratios out there (read here). And we are talking about the sector as a whole.

And if you compare to the average PE ratio of the Tech Sector (eg. 46.29), it is not way high. Ultimately – it is the future/forward earnings.
Technology Sector
Price to Earning ratio is at 46.29 in the 4. Quarter 2017 for Technology Sector (Read here)

• 2 Reasons Tech Companies Have High P/E Ratios (read here)

By now, many would already be aware of Creative’s Super X-Fi technology.

A Super X-Fi dongle is expected to be released in the middle of the year at a price of US$150. Cheap if you compare it to the price one need to fork out for a high-end sound system. Creative also plans to launch a free application with limited functionality and to license the technology to other industry players.

Judging by that, it is going all out to capture all sectors of the market. Going low price and mass market.

• Creative Tech shares surge to decade high (read here)
• Creative soars 600% over seven sessions, prompts note of caution (read here)

Still, the increase in its stock price is just incredible. Nevertheless, at $8.30 (closing price on 6 March 2017), it is still far from its record high of $64 attained in 2000, when it had a market cap of $5.2 billion.

Why the meteoric rise in its Stock Price?

Promotion Strategy

Some people believe, it is the initial promotion strategy employed by Creative, whereby when stock watchers briefly moonlighted as tech reviewers last week. During which, Creative hosted them to a demonstration of the device. Many came out with raving reviews of the product.

• Creative shares jump after glowing reports on new product (read here)
• Listening to Creative’s new Super X-Fi Headphone Holography Technology (read here)
• Creative Super X-Fi Technology: Preview Experience (read here)

Marketing Strategy

Or it could be the overall marketing strategy: Since January, Creative said it has presented its Super X-Fi to headphone makers and received validation. It also said it would sell the new chip to other companies. The Super X-Fi technology is powered by a new chip said to pack five times more computing and digital signal processing power than Creative’s most powerful Sound Blaster chip, but consumes less than half the power.

How Creative intends to market the Super X-Fi is different from how it has marketed its Sound Blaster or MP3 players in the past, by taking big leaps (often with insufficient resources).

Creative won’t be putting Super X-Fi straight into retail. Instead, it will be rolled out as a crowdfunding project with backers given a range of solutions. Backers can choose from headphones with Super X-Fi built-in or dongles that they can use with their existing headphones.

And that is not forgetting, we are talking about a cash-rich company that intends to sell a cheap Super X-Fi dongle at US$ 150.

Creative is taking minimal financial risk via the crowdfunding route.

 

A company that knows its own weakness

Amidst the hype about the superb performance of the Super X-Fi, the cleverness of Mr. Sim’s marketing strategy is not lost on me. Mr. Sim is also a businessman (Chairman & CEO). And over the years, he knows his company’s weaknesses.

It is a cruel world out there with many sharks. It is like even before you move your chess piece, your enemies are already 3 steps before you.

Yes, Creative is cash-rich – SGD 118 mil (probably from infringement lawsuit wins). However, in comparison to many cash-rich Tech giants in the US and China, SGD 118 mil is really nothing.

Next, to be frank – I feel that Creative is not known for their design prowess. I don’t find the earphones nor the dongle visually appealing. I am sure Apple can design better. When I think of the past, their MP3 player also doesn’t look as appealing as Apple’s Ipod … Sorry, Mr. Sim.

And can Creative compete with the China Tech firms with their low-cost manufacturers backing? (Or even Vietnam or other South Asian countries firms imitators)….I think not.

So Creative basically can’t compete on resources (money), design, cost…..

But what is Creative actually selling? Is Creative selling the headphones, the dongle (hardware)… I don’t think so.

Mr. Sim basically eliminates the hardware portion of the product. He is selling a chip (or rather algorithms). How much does a chip cost to make? I don’t think much. And if there is essentially no hardware, he doesn’t need to worry about cost and design. Let others worry about that.

Not sure how to phrase it.. eg. Like how Bill Gates promote his Microsoft operating system to IBM or how Intel sell their chips, or how Qorvo is a provider of radio frequency (RF) solutions for mobile, defense, and infrastructure applications

Creative becomes essentially becomes a pick-axle supplier for the sound industry if it succeeds.

Yes, without a doubt, there will be imitators, probably within weeks or months.. if the product is good. Patents might minimize it but perhaps given the buzz, Creative might have the first mover advantage. And of course, infringement lawsuits might just create another revenue stream.

The profits won’t be immediate, but if they can succeed in this, there will be long-term recurring profits. Actually, I seriously doubt the US 150 can cover Creative’s R&D and manufacturing cost… but well, it won’t kill this company. But then I don’t think Creative is after the initial wave of profits too.

 

 

The Sim Mong Woo factor

Then there is the Sim Mong Woo factor.

For many listed companies, investors typically do not really consider the management as a Business Moat. After all, in many cases, it is the company that came first, then the management / CEO.

“If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station – I’m talking of the past – you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference.” Warren Buffett

However, for a few select companies (often tech firms), brilliant and well-educated CEOs and managers sometimes become synonymous with their company. Whether it’s Steve Jobs, Mark Zuckerberg, or Jeff Bezos, it’s hard to separate the man from the operation.

Creative Technology and Mr. Sim is one such example.

• Bezos Prime (read here)

I believe Mr. Sim has always been consistent in his narrative about his passions and how Creative Technology’s strength is, over many years. Mr. Sim is getting better at his ‘pitch’.

Mr. Sim, a tech veteran of more than 30 years, whose 3 main passions are Technology, Chinese and Singapore. And who draws a salary of $1. Very few people can be passionate about sound technology for 30 years and after so many setbacks.

Extract from this article.

All my life, I have three “passions”.

I am passionate about technology. I am a tech junkie and I will dive into any new technologies and research and develop a lot of new technologies.

My second passion is Chinese. I am passionate about Chinese history and culture. I believe it is something we ought to know because it is our background and history.

My third passion is Singapore. In fact, for Creative Technology, the best place to grow is in the US. We can move the entire company to the US because Creative Technology is a tech firm. Don’t stay in Singapore, just move everything to the US and look for talent there. There’s so much talent there, especially in Silicon Valley. But we decided to stay in Singapore and invested in Singapore. All the marketing, technologies and methods are here in Singapore, we want to nurture locals. Even for projects involving the Chinese language, which should have been done in China, I said, do it in Singapore.

Many people would familiar with the Creative Sound Blaster. And many Singaporeans would probably want Mr. Sim to succeed even if they do not even know or tried this new Super X-Fi technology. I guess they want to believe. They want to believe that tiny Singapore can produce a Tech giant.

Very few tech companies choose to remain in Singapore or actually originated from Singapore. Or even choose to list in the Singapore Stock Market.

Razer and its co-founder and CEO, Tan Min-Liang comes to mind.

Extract from this article (emphasis mine):
“To some in Singapore, Tan is the Sim Wong Hoo of his generation, a Sim Mach 2, if you like, after the innovative founder of Creative Technology. But Tan bristles at a full comparison with Sim, who turns 60 this year, insisting that he is not a “poster boy” for Singapore’s technology industry. “We didn’t build the company in Singapore. Sim did,” he says curtly.
It’s just the laws of probability, Tan surmises. “I don’t necessarily think location makes a difference, but talent pool. There are four or five million people in Singapore. If you have a much larger pool or a bunch of engineering talent in a single location, then the chances of getting more start-ups or engineers are higher.
“You see a lot of entrepreneurs here, primarily because of the nature of the talent. You get a lot of finance and real-estate people, but not much engineering. That’s how it is.”

Creative Technology voluntarily delisted from NASDAQ on August 1, 2007 (read here), but remain listed in SGX. While Razor chose to list in Hong Kong in 2017 (read here).

On another note, I believe a key strength in Creative (which is perhaps lesser known), is its ability to challenge bigger companies legally (via patents). However, the win via patent may not be the be all and end all. In the case of Creative’s previous legal disputes with Apple, Creative may have won the battle, but it lost the war.

However, I seriously think Sarine Technologies can learn something from Creative here.

• Apple settles with Creative for $100 million (read here)

When selling is more important than building…

Occasionally, I would meet up with some of the young start-up founders. Mr. Sim, on the other hand, belongs to an era before the terms ‘Series A, B, or C funding or incubator’ were commonplace.

I have met a couple of new startup founders who seem to put the cart before the horse (although I must say they do not represent the majority of the younger startup founders). Even before they have a real working company/team, or good service or product… their first thought inevitably drift to the ‘selling of the company’ part.

They are more concerned about how much the venture capital companies or US / China tech giants would pay to have a slice of their company, rather than struggling to hold on to their companies and take the competitors straight on…

They are not interested in finding people who can network or brainstorm or solve business models… they are interested in people or companies with deep pockets. We just could not keep the conversation focused on their business strategy, services or products… it inevitably drifts to how much to invest (and if I know any VCs).

Challenge Alibaba, Uber, Apple, Tencent…..it is IMPOSSIBLE. Just buy me out.

They think of the many ‘Unicorn’ companies whose valuation have rocketed up relentlessly, even though the companies themselves are still loss-making. Perhaps it is the fact, that we have so much liquidity floating around these days, people are willing to throw money at any companies with no track record or viable products/services.

It becomes more of a pricing game rather than the pure valuation of a truly functional company.

Entrepreneurship is indeed tough. To compete with the best in the world from Singapore is even harder.

Nevertheless, for whatever reason, I do hope Creative Technology latest product will turn out to be its best product ever.

Shall leave you with this song (think it is appropriate for this stock).