PSB Monthly Issue March 2010

| March 2, 2010

March 2010


At the beginning of 2009, it looked like the semiconductor industry was going to have the worst year in its history.

Thanks to the financial crisis, demand for silicon chips had fallen off a cliff.  And, no one expected the industry to recover any time soon.

I guess it’s true that “it’s always darkest before the dawn.”

Instead of spiraling further down, the industry hit bottom in March.  It then proceeded to recover gradually throughout 2009.

When all was said and done, chip industry revenues declined just 9%.  (A much better result than anyone expected.)

The recovery is now gaining momentum in 2010.

In January, chip sales soared 47% over last year’s anemic levels.  And, they increased slightly over December 2009’s strong numbers.

The Semiconductor Industry Association is now calling for a return to “normal” growth in 2010.

And, at least one independent research firm is predicting chip sales will surge 20% in 2010 and continue growing through 2014.

While this is definitely good news for chip makers, it’s great news for semiconductor equipment manufacturers.

These companies supply the machines and tools chip makers use to manufacture semiconductors.

The chip equipment makers have suffered two straight years of huge declines. Industry sales plunged 46% in 2009 after a hefty 31% drop in 2008.  In December 2009, industry sales fell to the lowest levels seen since 1994.

Chip makers essentially stopped investing in new manufacturing equipment in late 2008 when the recession began.  However, as business starts to recover, we’re seeing an uptick in equipment order bookings.

In January 2010, North American chip equipment makers posted a huge 24% increase in bookings over December’s figures.  And, bookings were three times higher than in the year ago period.

Bookings are now at the highest levels seen since April 2008.

Clearly, all signs point to a strong recovery in the chip equipment industry this year.

In fact, the industry’s trade association recently forecasted strong growth for the next two years.  They’re expecting chip equipment sales to grow a whopping 53% in 2010 and 28% in 2011.

This is definitely one trend we don’t want to miss.

Shares of chip equipment makers tend to post huge gains during the early stages of an industry growth cycle.  And, I’ve found a high quality chip equipment maker still trading at penny stock levels.

Introducing, Kulicke & Soffa Industries (NASDAQ: KLIC).

Key Investment Data

Name:  Kulicke & Soffa Industries
Ticker Symbol:  KLIC
Market Cap:  $459 Million
Recent Price:  $6.58

PSB Rating System 4.9 Stars

Raging Revenue:  (5.0 stars) Revenue growth should accelerate sharply this year as chip makers boost capex investment.  And, several company specific catalysts should give revenue growth an added boost.

Beautiful Books:  (5.0 stars) Earnings are expected to grow a healthy 23% a year over the next five years.  Estimates across the board are moving significantly higher. And, the company’s balance sheet is rock solid.

Stellar Structure:  (4.5 stars) Insider ownership is strong for a company of this size at 18%. Institutions also clearly like the stock with 70% ownership.  But, we’d prefer to see this a little lower.

Valuation Verification:  (5.0 stars) The stock is badly mispriced by the market.  Based on our valuation analysis, we think the stock is worth at least $16.20 a share.  That’s upside potential of 146% or more.

Meaningful Milestones:  (5.0 stars) The company just received their first purchase order in January 2010 for their new state-of-the art die bonder… the iStack.  Management believes the iStack will ultimately dominate the die bonder market.


KLIC is a global leader in the design and manufacture of semiconductor assembly equipment.  Their equipment is used to assemble integrated circuits, high and low powered discrete devices, LEDs, and power modules.

The company’s customer list reads like a who’s who of the semiconductor industry.Their customers include industry heavy weights Intel, Texas Instruments, Samsung, and Micron Technology, just to name a few.

The company operates two main businesses.

The Equipment business sells a line of ball bonders, heavy wire wedge bonders, and die bonders.  (I know this sounds complicated… but stay with me.)  All you need to know is these machines are critical to performing the highly complex back end process of packaging semiconductors.

The company’s other line of business is Expendable Tools.  KLIC sells a variety of expendable tools including capillaries, bonding wedges, and saw blades.  Each tool is used in a very specific piece of equipment.

KLIC is the market leader in all but one of their product categories.

As such, the company is poised for higher growth rates and better profitability as the industry recovers.  In addition, several specific growth drivers should give the company an added boost.

The first driver is in the ball bonding business.

Chip makers are just beginning a multi-year replacement cycle for ball bonders.  Due to the high price of gold, they’re replacing their machines using gold with copper bonding machines.  KLIC expects this trend to drive strong growth in ball bonder sales for several years.

Another big driver is the fast growing LED market.

LEDs’ sales are projected to increase 15% a year through 2013.  Last year, KLIC launched new equipment for LED assembly.  They’ve already captured a significant share of this high growth market.  And, they’re looking to expand it further.

Finally, the company expects to lead the die bonder market with their newest die bonding platform… the iStack.  According to the company, this state-of-the-art machine offers best-in-class throughput and accuracy.

As you can see, KLIC is poised for several years of outperformance.  The industry is in the early stages of a new multi-year growth cycle.  And, the company has significant catalysts to drive revenue growth and increased profitability.

Let’s take a look at their recent financial results.


If all you did was glance at the company’s full year 2009 results, you’d think this company is in dire straits.  Revenue declined 31% to $225 million. And, the company lost nearly $59 million or $0.95 per share.  (Not a great year by any stretch… but better than analysts had expected.)

However, you’d be missing the bigger picture.

You have to take a closer look at the quarterly results over the year to really see what was happening.  If you dig a little deeper (as I did), you’d see business was actually improving steadily throughout the year.

Keep in mind, KLIC reports on a fiscal calendar that ends in September each year.

Most of the losses in 2009 happened in the second quarter (ending in March 2009).  It was one of the worst quarters in the company’s 58 year history.  Business essentially ground to a halt as customers saw no signs of near-term recovery.

Although prospects for recovery looked bleak, March 2009 was the bottom of the industry downturn.

The company started showing improvement in the third quarter (ending in June 2009). They posted another loss, but it was smaller than the second quarter’s. Severe cost cutting efforts were clearly helping to shrink losses.

More importantly, revenue more than doubled the prior quarter’s figure.  Sales of equipment and tools soared as customers began ramping up for an industry wide recovery.

Finally, in the fourth quarter (ending September 2009), the company returned to profitability. Once again, revenue more than doubled the prior quarter’s levels. And, earnings soared 139% to a profit of $0.09 per share.

The company recently reported first quarter 2010 (ending December 2009) results. And, they clearly show the recovery is continuing.

Compared to the fourth quarter of 2009, revenue jumped 16% to $128 million.  Net income increased a whopping 174% to $15.8 million.  And, earnings soared 163% to $0.21 per share.  (A third consecutive upside surprise!)

Best of all, analysts are scrambling to up their earnings estimates for this fiscal year and next.

A week ago, analysts were forecasting 2010 earnings of $0.19 and 2011 earnings of $0.38.  The current consensus estimates are now $0.81 and $1.01 respectively. (These are huge increases!)

This is great news for KLIC and shareholders.  Remember, nothing drives a stock price like rising earnings estimates.

In addition to improving revenue and earnings, KLIC has a solid balance sheet.

The company’s heavy cost cutting efforts and debt retirement program have put their balance sheet on firm footing.  The company’s sitting on $175 million in cash.  Current assets are 2.4x current liabilities.  And, total debt is down more than 40% since the end of fiscal year 2008 to $147.2 million.


Like any investment, an investment in KLIC does involve some risks.

The positive outlook for KLIC depends on the global economy and the chip industry continuing to recover.  A slip back into recession would likely hurt future results.

Another risk is the company’s exposure to fluctuations in foreign currency exchange rates.  As the company conducts nearly all its business outside the U.S., big moves in the U.S. Dollar, up or down, can impact results.

A third risk is the company’s reliance on a small number of large customers for a big portion of sales.  The loss of one or more of these customers could cause business to suffer.


KLIC is poised to generate big returns for shareholders this year (and quite possibly next year as well).  But, despite the company’s big growth drivers, the shares are badly mispriced by the market.

Here’s what I mean…

The company’s expected to grow earnings 23% a year over the next five years. However, the stock is trading at just 8.8x the FY 2010 earnings estimate of $0.81 per share.  This results in a very low PEG ratio of 0.38.

In other words, the shares are trading at a 62% discount to their long-term growth rate.

Moreover, the industry average P/E ratio of 17.4x is more than double the company’s. Since KLIC is growing much faster than most companies in the industry, we think it deserves a higher P/E.

Using a conservative P/E of 20x the FY 2010 estimate, KLIC is worth at least $16.20. That’s potential upside of 146%!

Based on our analysis, we see the stock trading up to at least $16.20.  Buy
KLIC now for potential gains of 146% or more.


BUY Kulicke & Soffa Industries (NASDAQ: KLIC) up to $7.95 per share.

Recent price is $6.58.

Use a stop-loss of $3.29 on this position.

Don’t forget your position sizing and stop-loss rules.



In January 2010, Chinese exports grew by an amazing 21%.  This remarkable growth follows December’s strong increase of 18.5%.  December’s gain was the first increase in 14 months.

This is great news for Chinese companies who make their living exporting goods around the world.

Strong back-to-back monthly gains in exports are a good sign the global economy is truly recovering.  And, a recovering global economy means a return to growth for Chinese exporters.

In fact, Deutsche Bank recently upped their growth forecast for China’s export sector.They now expect the nation’s exports to grow by a massive 30% in 2010.That’s nearly double the earlier forecast of 16%.

More importantly, Deutsche Bank expects export growth to gain momentum as the year progresses.

This is welcome news for Chinese exporters after a dismal 2009.  Chinese exports declined by 16% last year due to the global financial crisis.  And, many individual companies saw their business grind to a halt.

Another promising trend for Chinese exporters is rising capacity utilization rates.

This metric measures the rate at which potential output levels are being met.  As capacity utilization rates rise, companies typically enjoy stronger pricing power for their products.

In January 2010, the Chinese capacity utilization rate surged to 84%.  This is a huge improvement from the low of 66% set a year ago.  And, it’s rapidly approaching the all time high of 93% reached in the first quarter of 2008.

This big gain in capacity utilization indicates Chinese exporters are poised for greater profitability in the months ahead.

After sifting through a number of small Chinese exporters, I’ve found a great penny stock to profit from this emerging trend.  The company is none other than Winner Medical Group (AMEX: WWIN).

Key Investment Data

Name:  Winner Medical Group
Ticker Symbol:  WWIN
Market Cap:  $133 million
Recent Price:  $5.96

PSB Rating System 4.8 Stars

Raging Revenue:  (5.0 stars) Revenue growth is poised to jump as the company increases sales of Winner and PurCotton products.  The ongoing global economic recovery should boost sales to overseas markets as well.

Beautiful Books:  (5.0 stars) Earnings are soaring as the company transitions from lower margin to higher margin products.  Estimates are for earnings growth of 41% this year and 33% next year.

Stellar Structure:  (4.5 stars) The company’s CEO owns more than 80% of outstanding shares.  We’d prefer to see less ownership concentration in one individual.

Valuation Verification:  (5.0 stars) The stock is badly mispriced by the market.  Based on our valuation analysis, we think the stock is worth at least $13.34 a share.  That’s upside potential of 123% or more.

Meaningful Milestones:  (5.0 stars) The company recently launched its proprietary PurCotton line of products.  The company expects to double production levels in the next few months.


WWIN is China’s largest exporter of medical dressings and disposable medical products. They make a ton of different products. Things like gauze, cotton balls, sponges, bandages, adhesive tape, surgical gowns, face masks, gloves, and medical instruments, just to name a few.

Plus, they make a line of medical dressings and products using their proprietary PurCotton technology.

The global market for disposable medical products is about $100 billion.  And, worldwide sales of medical dressings are over $14 billion.  With just under $100 million in revenue last fiscal year, WWIN clearly has plenty of room to grow.

Nearly 85% of their revenue is generated from exports.

The company sells its products in 80 different countries worldwide.  Primary markets are Europe, Japan, North America, and South America.  These four markets account for more than 75% of sales.

WWIN is starting to see a pick-up in demand from these markets as the global economic recovery gains momentum.

A smaller but faster growing market for WWIN is the Chinese domestic market.

Demand for disposable medical products in China has grown 14% annually since 1990. And, demand for medical dressings is expected to grow at better than 30% a year through 2013.

Clearly, China has potential to be a major growth driver for the company.  And, WWIN is perfectly positioned to tap this growth through its established distribution network.

Cooperation with 7 of China’s top 10 drug stores provides access to 20,000 stores in all major cities.  They have strong relationships with over 30 hospitals in Guangdong Province.  And, a joint venture with the largest hospital in Asia gives them full coverage of Western China.

As you’ll see later on, the company is already starting to post huge sales in the fast growing Chinese market.

The company’s unique marketing strategy is a big contributor to its success.

In the developed markets, WWIN acts as a supplier for its clients.  This approach allows WWIN to leverage their customers’ strong brands and established distribution networks.

However, in China and other developing countries, WWIN sells products under the company’s proprietary “Winner” brand name.  This brand’s reputation for high quality and low prices is helping generate huge sales increases every quarter.

Most of the company’s sales are generated from traditional medical dressings and disposable medical products.  But, that could be changing in years to come.

WWIN’s proprietary PurCotton material might just be a game changing technology.

PurCotton provides several advantages over woven cotton and synthetic non-woven fabric.  Best of all, WWIN can produce PurCotton products at a lower cost than woven products.

The market opportunity for PurCotton is absolutely huge.

Global sales of non-woven medical products are expected to reach $12 billion this year.  And, demand for these products is growing at better than 20% a year in China.As an ideal, cost-effective substitute, PurCotton could eventually steal a large share of this market.

Management’s grabbing this opportunity with both hands.

Two PurCotton production lines went online at the end of last year.  And, two more are preparing to begin production in March and May of 2010.

As a result, PurCotton product sales should help boost sales and profit margins this year and beyond.

Let’s now take a peek at WWIN’s financials.


Despite the struggling global economy, WWIN grew sharply in FY 2009.

Revenue increased 15% to $98.4 million.  Net income surged more than 80% to $9.1 million.  And, earnings grew 78% to $0.41 a share.

Strong sales in North America and South America helped offset a decline in Europe. And, accelerating sales of Winner products in China and PurCotton products globally are starting to drive growth rates higher.

These same catalysts are driving strong growth so far in FY 2010.

In the first quarter, revenue rose nearly 16% to $29.8 million.  Net income soared 165% to $3.9 million.  Earnings increased by a whopping 143% to $0.17 per share. And, earnings beat estimates by more than 30%.  (Now that’s what I call a great quarter.)

Winner and PurCotton products showed robust growth for the second consecutive quarter.

Net sales of Winner products in China soared from $2.6 million a year ago to $8.1 million.  PurCotton sales worldwide grew sharply from just $0.8 million a year ago to $2.5 million.  And, the two segments combined accounted for more than a third of total revenue.

I expect strong sales in these segments to continue driving rapid growth this year and well into next!

In addition to strong growth, WWIN has a solid balance sheet.

The company’s sitting on $7.5 million in cash.  Current assets are more than 2.6x current liabilities.  They have no long-term debt.  And, the business generated $3.2 million in net cash from operating activities last quarter.


Of course, an investment in WWIN does involve some risks.

Growing international concern over China’s huge trade surplus could lead to trade restrictions.  Any such restrictions on the company’s products could hurt results.

Another risk is the company’s reliance on their top customer for more than 15% of sales.  If this customer stops buying from WWIN, the company’s growth could slow.

A third risk is the concentration of ownership in the company’s CEO.  With ownership of more than 80% of outstanding shares, he has complete control over the company.


WWIN is poised for big gain in 2010.

The company’s expected to grow earnings 38% a year over the next five years.  But, the stock is trading at just 12 times earnings.  That results in an extremely low PEG ratio of 0.32.

In other words, the shares are trading at a 68% discount to their long-term growth rate.

The average P/E ratio for companies in the industry is 23x.  Since WWIN is growing twice as fast as the industry average growth rate, we think it deserves a P/E at least equal to the industry average (if not higher).

Using a conservative P/E of 23x FY 2010 estimated earnings of $0.58 per share, WWIN is worth at least $13.34.  That’s potential upside of 123%!

Based on our analysis, we see the stock trading up to at least $13.34.  Buy
WWIN now for potential gains of 123% or more.

Editor’s Note:  WWIN is a very thinly traded stock.  Please be sure to a use a limit order when placing your trades.  Don’t chase it beyond the buy up to price.  If you don’t get in right away, be patient.  You might have an opportunity later to pick it up on a pull back.


BUY Winner Medical Group (AMEX:WWIN) up to $8.55 per share.

Recent price is $5.96.

Use a stop-loss of $2.98 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

    • Sell Electronic Game Card (OTCBB: EGMI) as soon as it resumes trading.  The company’s cancelling of the conference call indicates the accounting problem is serious.


  • We issued a sell recommendations in our last Portfolio Update for China Biologic Products (NASDAQ: CBPO).


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