WeTouch Technology (WETH)
Profitable Chinese net net trading at 0.2x book value
Thesis summary
WeTouch Technology is a chinese manufacturer company specialized in the fabrication and commercialization of medium to large sized projected capacitive touchscreens. The company has been profitable for the past 5 years and currently has a net cash position of $90 million, which is the result of the many share dilutions it has undertaken. The company announced a stock repurchase program of $15 million as it currently trades with a market cap of $19 million which allows for a potential reevaluation in the case the program is executed.
Business Model
Core Operations
The company operates its business from Sichuan where it has set up its factories. The company offers medium to large sized projected capacitive touchscreens, which can be categorized as: Product type GG, GFF, PG and GF which have a diverse array of industry and areas of application.
The distribution of revenues by areas of application can be seen below, noting the importance of the automotive industry demand:
Management is trying to diversify its sources of revenue geographically as it is currently concentrated in national sales. For the six month ended in June 2024 international sales amounted to $9.8 million compared to the six month period in 2023 of $7.8 million.
The company has maintained profitability over its 5-year history achieving at least a 30% operating profit over the years. Their order-based business model and low operating expenses provide a safeguard against losses. By purchasing only what they can sell, they avoid inventory buildup, preventing potential devaluation and financial losses.
Key concerns
Missing strong shareholder structure: Currently there is not a shareholder of the company that owns more than 5% which could lead to potentially high agency costs and mismanagement of capital resources. It is also surprising that the founder of the company Guangde Cai currently does not hold more than 5% when in 2020 he held almost 30% of the company.
Concentration: WeTouch acts as a supplier of touchscreens to a limited number of companies with its top 5 customers making 80% of its revenue. This positions the company in a vulnerable position, as it allows customers to put pressure on the company's prices, which could significantly reduce the gross margin. It's worth noting that no single customer accounts for more than 20% of total sales.
Shareholder remuneration: Given the amount of cash held and the illiquidity of the stock dividends would seem as a viable shareholder remuneration option. However, management has stated multiple times that they do not foresee any cash dividends in the foreseeable future.
CEO and management remuneration: management does not hold any shares of the company making their interest misaligned with those of the shareholders. Moreover, CEO and CFO annual compensation is based on a salary of $20k which seems low comparing to other peers. In July 2024 the company appointed a new CFO whose compensation is 5k a month.
Further dilution or stock issuances: Since January 2023 the company has issued 10 million shares as of June 2024 there are 12 million shares outstanding. These public and private offerings have been done at attractive prices of 5$ per share which have increased the company cash reserves excessively. The 2 million public share offering in February 2024 has been justified by management as looking for a correct valuation through a NASDAQ listing and raising funds to build the new factory although the company had $98 million in cash.
Mismatching number of shares outstanding: the 10-Q report for the first quarter of 2024 shows different numbers of shares outstanding in the income statement than in other parts of the report 13.3 million vs 11.9 million. This has been corrected in the most recent 10-Q report where 11.9 million shares outstanding is the unique reported number.
Opportunities
International Market Expansion: Revenue from overseas markets grew by 26.9% in the first half of 2024, reflecting a strong potential for expansion, particularly in gaming and automotive touchscreens.
Cost Reduction Potential: The expected reduction in chip costs as China ramps up production could improve margins, provided the company can effectively manage its cost structure. The price of Induim which is the main raw material used for touchscreens has increased almost 50% in 2024 and from its prior peak in 2018.
Construction of New Facilities: Completion of new production facilities in Chengdu, China, by early 2025 could boost capacity and operational efficiency.
Stock Repurchase Program: The planned repurchase of up to $15 million in shares, currently trading at a low market capitalization, suggests management believes the stock is undervalued.
Conclusion
An extreme conservative estimate of the company being a fraud could be 50% given our research and comparison across different sources (Google Maps, LinkedIn, Baidu, company websites). Even with such a conservative scenario we believe a company like this should trade at least at a multiple of 1x sales or 0.5x book value which would return a 100% over current market cap. This potential revaluation could be pushed upwards by the stock repurchase program.
Although there is no strong shareholder to look after the shareholders and management remuneration is not aligned with shareholder returns, we believe that the share offers a very good risk/reward ratio. The new CFO will bring better guidance in reporting operations which could help clarify the future of the company.