Quarz Capital Management, Ltd. Issues Open Letter to the Management and Board of Sunningdale Tech (SGX: BHQ)
GEORGE TOWN,Cayman Islands,March5,2019 -- Quarz Capital Management,Ltd. Sends Open Letter to Sunningdale Tech Ltd to Urge Board and Management to Take Immediate Action to Enhance Shareholder Value. Consistent with Our Previous Engagement,We Believe the Execution of Our Proposals Can Deliver a Total Potential Share Price Return of >40% Over The Mid-Term.
ALL RECIPIENTS ARE ADVISED TO READ
"IMPORTANT DISCLOSURE INFORMATION"
AT THE END OF THE ATTACHED LETTER
QUARZ CAPITAL MANAGEMENT,LTD.
CLIFTON HOUSE 75 FORT STREET
GEORGE TOWN I KY1-1108 I GRAND CAYMAN
CAYMAN ISLANDS
5 March 2019
Dear Mr. Khoo,Ms. Soh and Members of the Board,
We thank you for your response and the meeting in January where we had an open and constructive discussion on Sunningdale Tech Ltd (the "Company","Firm"," "SUNN SP","Sunningdale" or "SUNN") and strategies to increase shareholder value.
The strong negative market reaction to SUNN's 4Q18 result is disappointing and clear evidence of what we have highlighted earlier as a significant lack of transparent and quality reported information creating unnecessary uncertainty and shareholder value destruction.
SUNN continues to incur one-off startup costs at its new Penang plant as it accelerates on hiring,training as well as material and equipment preparation to ramp up high volume projects in the Consumer Electronics and Healthcare sectors. The firm also incurs duplicity in operating cost (e.g. rent,labor,equipment) as it retains its production in Shanghai. This is due to the delay in the stringent qualification process which postponed the shift of the entire Shanghai operations to SUNN's Chuzhou megafactory. We estimate these non-recurring costs at more than S$3 million in 4Q2018. SUNN's 4Q2018 and 2018 Core Net Profit from underlying operations without these one-off costs is projected to be more than S$5million and S$24million respectively,considerably closer to consensus estimates. This result was achieved despite the headwinds from the China-US trade war which disrupted global sentiments and demand especially in the auto segment.
The increase in centralization and expansion of SUNN's production at lower cost Chuzhou will increase production capacity,cost advantages and operating margins. The progressive ramp up of the new Penang plant will reduce the one off drag and further add to underlying core profit from 2H2019. Despite its recent opening,the new plant has already secured several projects and will benefit from the structural trend of major MNCs increasingly diverting part of their supply chain out of China. We are confident that the increase in production,utilization rate and operating leverage coupled with a lower cost base can bring SUNN's core profitability back to 2016-17 level from mid-2019 onwards.
It is critical during this transitory period of uncertainty that SUNN's management and board take responsibility and commit to increase shareholder valueby clarifying and providing additional operating information. Of particular importance is to quantify the total gross/operating loss in Penang and the cost of inefficiencies in maintaining duplicate operations and shifting between Shanghai to Chuzhou.
This disclosure enables shareholders to separate one-off ramp up costs from underlying operations and allows for better evaluation of the underlying fundamentals and intrinsic value of Sunningdale. The blended cost item will not affect SUNN's competitive advantage as it comprises consolidated costs in both Penang and Chuzhou plants at different stages of ramp up which include various cost items such as shifting,restructuring and qualification costs. Competitors can draw little insight from such a commingled item,yet it serves as a valuable information for shareholders. A conservative estimate of such a metric should be readily available,given Sunningdale's tight financial control and supervision. Other valuable insights include new projects,and potential profitability and margin targets as the firm ramps up from 2H2019.
Management has emphasized the focus on growth strategies and fundamentals to bring more enduring long term value accretion. The increase in transparency and higher quality information will enable shareholders to have greater clarity and forecast on long term profitability and the intrinsic value of the business instead of focusing on volatile quarterly financial reporting.
We welcome the increase in dividend. Our conservative model reflects SUNN can generate more than S$30million of free cash flow in 2019 as the firm substantially completes expansionary capex and continues to ramp up. This is in addition to the comfortable balance sheet strengthened by the recent factory disposal and potentially higher cashflow from increased production in 2020. We urge SUNN to further increase its dividend payout to shareholders in 2019. The increase in dividend can demonstrate that management is confident and committed to deliver on its growth strategies and enhancing of shareholder value. It also rewards its shareholders for their patience and unwavering support during this transitory period.
Post the correction,Sunningdale Tech trades (ex-dividend) at a depressed projected P.E 2020E of 8.2x (core net profit of S$31.5million) with EV/EBITDA of 3.5x. SUNN has one of the most significant ramp up in production and profitability due to its new plants and projects from 2H2019 but continues to trade at a severe discount to peers. Quarz continues to retain a substantial stake in Sunningdale Tech and intends to add to its position on further price weakness. We believe that our recommendations as detailed in our previous engagement and this letter can provide a potential total return of more than 40% for all shareholders in the mid to long-term. We call on board and management to take immediate action to address this shareholder value destruction and look forward to continuing to work with the company to increase value for all shareholders.
Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer,Quarz Capital Management,Ltd.
Mr. Havard Chi,CFA
Head of Research,Quarz Capital Asia (Singapore)
For further information,please contact:
operations@quarzcapital.com
About Quarz Capital Management
Quarz Capital Management,Ltd. is a value oriented and research driven investment advisory firm that seeks to earn above average,long-term returns by identifying value investments across the globe.
www.quarzcapital.com
IMPORTANT DISCLOSURE INFORMATION
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF SUNNINGDALE TECH LIMITED'S SECURITIES AND ACTION THAT SUNNINGDALE TECH LIMITED'S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE,NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. SUNNINGDALE TECH LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT,NOR HAVE WE RECEIVED,PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE,NOR DO WE INTEND TO RECOMMEND OR ADVISE,ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF SUNNINGDALE TECH LIMITED'S SECURITIES,THIS LETTER DOES NOT PURPORT TO BE,NOR SHOULD IT BE READ,AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH SUNNINGDALE TECH LIMITED'S SECURITIES MAY TRADE AT ANY TIME. AS NOTED,THIS LETTER EXPRESSES OUR CURRENT VIEWS ON SUNNINGDALE TECH LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF SUNNINGDALE TECH LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING SUNNINGDALE TECH LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING SUNNINGDALE TECH LIMITED AND ITS PROSPECTS WITHOUT RELYING ON,OR EVEN CONSIDERING,ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
As of the publication date of this report,Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"),others that contributed research to this report and others that we have shared our research with (collectively,the "Authors") have long positions in and own options on the stock of the company covered herein (SUNNINGDALE TECH LIMITED) and stand to realize gains in the event that the price of the stock increases. Following publication of the report,the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However,such information is presented "as is",without warranty of any kind – whether express or implied. The Authors make no representation,express or implied,as to the accuracy,timeliness,or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice,and the Authors do not undertake to update or supplement this report or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices,data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors' views as of this date,all of which are accordingly subject to change. The Authors' opinions and estimates constitute a best efforts judgment and should be regarded as indicative,preliminary and for illustrative purposes only.
Any investment involves substantial risks,including,but not limited to,pricing volatility,inadequate liquidity,and the potential complete loss of principal. This report's estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security,and is not expressed as,or implied as,assessments of the quality of a security,a summary of past performance,or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment,security,or commodity discussed herein or of any of the affiliates of the Authors. Also,this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors' abilities and beliefs,all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates,officers,and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document,investors should assume that the Authors are long shares of SUNNINGDALE TECH and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company's common equity is higher than prior to the original publication date. These affiliates,and individuals shall have no obligation to inform any investor about their historical,current,and future trading activities. In addition,the Authors may benefit from any change in the valuation of any other companies,securities,or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors' operations and their affiliates. The compensation structure for the Authors' analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors' documents.
The information contained in this document may include,or incorporate by reference,forward- looking statements,which would include any statements that are not statements of historical fact. Any or all of the Authors' forward-looking assumptions,expectations,projections,intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks,uncertainties and other factors,most of which are beyond the Authors' control. Investors should conduct independent due diligence,with assistance from professional financial,legal and tax experts,on all securities,companies,and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS LETTER ARE FORWARD-LOOKING STATEMENTS INCLUDING,BUT NOT LIMITED TO,STATEMENTS THAT ARE PREDICATIONS OF OR INDICATE FUTURE EVENTS,TRENDS,PLANS OR OBJECTIVES. UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS BECAUSE,BY THEIR NATURE,THEY ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR ACTIVITIES AND ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES. DUE TO SUCH RISKS AND UNCERTAINTIES,ACTUAL EVENTS OR RESULTS OR ACTUAL PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF THE FUTURE TENSE OR OTHER FORWARD-LOOKING WORDS SUCH AS "VIEW," "BELIEVE," "CONVINCED," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "SHOULD," "MAY," "WILL," "OBJECTIVE," "PROJECT," "FORECAST," "MANAGEMENT BELIEVES," "CONTINUE," "STRATEGY," "PROMISING," "POTENTIAL," "POSITION" OR THE NEGATIVE OF THOSE TERMS OR OTHER VARIATIONS OF THEM OR BY COMPARABLE TERMINOLOGY.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS SET FORTH IN THIS LETTER INCLUDE,AMONG OTHER THINGS,THE FACTORS IDENTIFIED IN THE RISK SECTIONS IN SUNNINGDALE TECH LIMITED ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31ST,2017 AND PROSPECTUS. SUCH FORWARD-LOOKING STATEMENTS SHOULD THEREFORE BE CONSTRUCTED IN LIGHT OF SUCH FACTORS,AND QUARZ CAPITAL MANAGEMENT IS UNDER NO OBLIGATION,AND EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION,TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS,WHETHER AS A RESULT OF NEW INFORMATION,FUTURE EVENTS OR OTHERWISE,EXCEPT AS REQUIRED BY LAW.
