Cedric Yang contributed this article to NextInsight
During times of crisis, such as currently, opportunities to scoop amazing companies presents themselves, often hidden under fears and stormy macroeconomic weathers.
Of the many excellent companies, I will talk about the investment thesis for these 2 Singapore listed companies, ISDN Holdings (I07) and AEM Singapore (AWX).
|#1 High inflation and cost pressures|
ISDN has strong and stable pricing power and can pass the costs down to the customers. Their gross margin remained stable throughout the years and their productivity improvement driven by the management increased their profit margin year on year.
It is also noteworthy (often understated) that ISDN has been profitable since its listing in 2005 on the Singapore Exchange.
That includes the Global Financial Crisis in 2008, Europe debt crisis in 2012, China economic crisis in 2015, trade war in 2018, and Covid pandemic in 2020.
Oftentimes, companies such as ISDN that is exposed to Europe and China market should be severely affected by events such as trade wars, but ISDN’s huge base of technology partners and diversified base of more than 10,000 customers make it extremely resilient.
As such, it is a fortress in terms of defense. ISDN proved itself to be more than just a defensive fortress by recording historical profitability growth during the pandemic.
A pandemic that figuratively stopped the entire world through lockdowns and apocalyptic infections. If that isn’t proof that ISDN has both strong moat defenses and growth appetite, I do not know what is.
|#2 China Zero-covid policies|
ISDN earns circa 70% revenue from China.
With the zero-covid policies in China, ISDN will be inevitably affected through sporadic lockdowns while the rest of the world resumes post-pandemic lives.
However, I see this as a silver lining for ISDN.
The zero-covid policy is going to drive greater adoption of automation, robotics, remote monitoring, and data & software analytical management.
Even if China changes its stance on Covid from zero to endemic, such demand will still be present as automation in China is a strong tailwind (See International Federation of Robotics article; and South China Morning Post article.)
|#3 High interest rates|
Central banks have been increasing the nominal interest rates to combat hot inflation.
This is a wildfire moment across many “tech” stocks which depended on loose monetary policies to borrow money for growth.
As the fire burns through, many of such weak stocks that are lumped wrongly together with cash and profit generating technology and growth stocks crashed to an average of 70-80% from all time high.
ISDN is a cash generating and profitable business, with loans on secured long term interest rates. Even if banks were to force a refinance to higher interest rates, ISDN could easily pay off all its debt obligations with its cash holdings.
I had previously written an article on ISDN Holdings here (ISDN: Why it fulfills all my investing criteria).
The above points reinforces my belief that ISDN will emerge stronger after this storm.
Tomorrow: Part 2 -- AEM
|See also: ISDN: How it's been able to navigate around market shocks|