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VTech (303 HK) is a Hong Kong toy and electronics manufacturer run by an energetic entrepreneur called Allan Wong.
The company was founded in 1976 as a manufacturer of video games, mostly for third parties such as Radioshack. Later on, Vtech branched out into toys, computers, cordless phones and a variety of other electronic products.
Today, three segments remain:
- Toys (“Electronic learning products”) (43% of revenues) for the North American and European markets. These products are sold under the VTech and LeapFrog brand names. This business is more or less stable.
- Contract manufacturing (40% of revenues) for third parties across audio equipment, earbuds, IoT products and the medical health industry. This segment has grown significantly over the past decade, more than tripling in revenue.
- Telecom products (17% of revenues), under their own VTech / Snom brand names and for third parties. These products include cordless phones for residential and business use, conference phones and baby cameras. The residential sub-segment is in decline, whereas the commercial & other telecom sub-segment is holding up well.
Electronics manufacturing is a competitive industry. But VTech is unique among its Hong Kong and Chinese peers in that it owns several valuable brand names such as LeapFrog, VTech and Snom.
It’s also an exceptionally well-run business. Allan Wong has made a conscious decision to enter businesses that require little PP&E and working capital, resulting in a high return on capital. He’s also been laser-focused on costs. For example, he’s been laying off employees quickly in the troubled residential telecom segment.
The capital allocation is among the best I’ve seen in Asia. VTech typically pays out 100% of its earnings as dividends. It also engages in M&A opportunistically when prices are low. The major acquisitions of the past few years have taken place at EV/Sales multiples of just 0.2-0.4x, and the acquisition targets have often had underutilised assets. More recently, VTech announced a share buyback of up to 10% of shares outstanding.
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