Thanks for the good question, Rocko! Their China division is struggling indeed, I briefly mentioned the weakness in their China business in the article. Since I have no first hand experience and no direct source from China, I must fall back on management commentary, discussed in the last conference call from nov. 15:
"The Chinese portion of the business is still struggling to find a way out of the slump we are experiencing. The slowdown is evident in the market as a whole and in our performance as well. The increased competition in the sheet-metal cutting laser system market enforced a strong prices and margin pressure that more or less, at constant production volumes, deflated revenues and gross margins, driving the bottom line to a definite [ range ]. The action we put in place to prevent the business to set the fourth loss quarter in a row are mainly focused on the improvements of the purchasing and manufacturing efficiency in order to achieve the lower cost of goods sold levels needed to expand sales and gross margins. An intense effort is being put in place to boost export sales which land on less competitive markets and therefore bear higher margins. An effort which is seeing both units, Cutlite Penta and Penta Zhejiang, of our sheet-metal cutting business, targeting the international market with the common goal of being less dependent from their own domestic markets."
-> My take is, they acknowledge that their industrial cutting business, especially in China, is cyclical and more competitive than their medical division. But that was always the case, their margins were always slightly worse in the industrial business. Since the industrial business is cyclical, it will bounce back eventually, exports could speed this recovery up. That is one reason for the undemanding valuation imo.
For me, this is not a thesis breaker at the current valuation. My thesis (in a nutshell) is, that this owner-operator business has not lost its engineering mojo and will continue to come up with good products and solutions and will benefit from an expanding end market in the years to come. But I could be wrong, that's for sure!
What do you think about the loss in competitive edge within sheet metal cutting in China (industrial division)?
Thanks for the good question, Rocko! Their China division is struggling indeed, I briefly mentioned the weakness in their China business in the article. Since I have no first hand experience and no direct source from China, I must fall back on management commentary, discussed in the last conference call from nov. 15:
"The Chinese portion of the business is still struggling to find a way out of the slump we are experiencing. The slowdown is evident in the market as a whole and in our performance as well. The increased competition in the sheet-metal cutting laser system market enforced a strong prices and margin pressure that more or less, at constant production volumes, deflated revenues and gross margins, driving the bottom line to a definite [ range ]. The action we put in place to prevent the business to set the fourth loss quarter in a row are mainly focused on the improvements of the purchasing and manufacturing efficiency in order to achieve the lower cost of goods sold levels needed to expand sales and gross margins. An intense effort is being put in place to boost export sales which land on less competitive markets and therefore bear higher margins. An effort which is seeing both units, Cutlite Penta and Penta Zhejiang, of our sheet-metal cutting business, targeting the international market with the common goal of being less dependent from their own domestic markets."
-> My take is, they acknowledge that their industrial cutting business, especially in China, is cyclical and more competitive than their medical division. But that was always the case, their margins were always slightly worse in the industrial business. Since the industrial business is cyclical, it will bounce back eventually, exports could speed this recovery up. That is one reason for the undemanding valuation imo.
For me, this is not a thesis breaker at the current valuation. My thesis (in a nutshell) is, that this owner-operator business has not lost its engineering mojo and will continue to come up with good products and solutions and will benefit from an expanding end market in the years to come. But I could be wrong, that's for sure!