Philippine Markets Daily

Innovation and brand collaboration helped this company stay relevant in the post-PC era, garnering 12%+ Uniform returns

June 2, 2021

Today’s company is benefiting from the current “At-Home Revolution” trend. Moreover, because of its innovations and strategic brand collaborations, it is able to stay profitable in the post-PC era.

However, as-reported metrics show that this computer hardware company is generating lackluster returns. Uniform Accounting paints a different picture, with more robust Uniform ROAs.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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The release of cellular phones with data connectivity can be traced back to the early 2000s during the rise of 3G technology. Blackberry was a popular choice among business people, and Nokia’s entertainment-focused NSeries was a favorite within the younger market.

The rapid proliferation of handheld devices with connectivity functions, such as smartphones, tablets, and other wearable devices marked the beginning of the “post-PC era” trend.

However, the PC market has been making a comeback because of the work-from-home, study-at-home, and play-at-home trend due to the pandemic—marking the “At-Home Revolution.”

With worldwide PC shipments growing by 275 million in 2020 or a 5% increase from 2019, the highest growth in the past decade, top players in the space are enjoying better returns. One such company is ASUSTeK Computer Inc.

ASUSTek, or more popularly known as Asus, was founded in 1989 by four colleagues who used to work at Acer’s hardware engineering department. The company started off as a motherboard manufacturer and then diversified and expanded its offerings to PCs, laptops, smartphones, tablets, and other computer hardwares to address market needs.

Being a technology company, Asus is known for its innovative offerings. In 2007, the company released its first Eee PC, a computer line known for being lightweight and low cost, with a Linux-based operating system. It also released laptops with bamboo materials used in its lids and wrist rest, which shows Asus’ commitment to the environment.

Aside from these innovations, the company managed to stay relevant during this post-PC era by entering into collaborations and partnerships with other companies.

One remarkable collaboration was with Lamborghini, when the two companies joined together to build a set of laptop models with designs inspired by the automobile company. The company also teamed up with Garmin in creating the Nuvifone, a hybrid phone that can be docked in a vehicle mount and can serve as a GPS device.

Asus Republic of Gamers (ROG), the company’s sub-brand for gaming hardwares, recently teamed up with IKEA to create a set of gaming products that includes furniture and accessories.

Given the company’s innovative efforts and strategic brand collaborations, Asus is expected to capture a wider customer base, which can lead to robust profitability. However, as-reported metrics show that the company has had a weak performance for the past 16 years, with as-reported return on assets (ROA) ranging from 2%-6% only.

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Uniform Accounting, however, shows how Asus’ innovations and brand collaborations are actually generating returns for the company. For the past 16 years, Uniform ROA ranged from 12%-21%.

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The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of non-operating long-term investments on Asus’ balance sheet.

These long-term investments are intangible assets that are purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of Asus’ earning power. Adjusting for non-operating long-term investments, we can see that the company isn’t actually displaying lackluster performance. In fact, it is the opposite, with returns that are more than 5x greater.

Asus’ profitability is much more robust than you think

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As-reported metrics are distorting the market’s perception of the firm’s profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics reveal.

Asus’ Uniform ROA has been higher than its as-reported ROA in the past sixteen years. For example, when Uniform ROA was at 21% in 2013, as-reported ROA was only 4%.

The company’s Uniform ROA for the past sixteen years has ranged from 12% to 21%, while as-reported ROA has ranged only from 2% to 6% in the same timeframe.

Specifically, Uniform ROA declined from 21% in 2005 to 12% in 2008, before rebounding to 21% in 2013. It then contracted back to 12% in 2019, before recovering to 20% in 2020.

Asus’ Uniform earnings margins are weaker than you think but its robust Uniform asset turns make up for it

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Volatility in Uniform ROA has been driven by trends in Uniform earnings margin and to a lesser extent, Uniform asset turns, with peaks and troughs lining up historically with that of Uniform ROA.

Uniform margins fell from 5% in 2005 to 3% in 2011, before rebounding to 4% in 2013. It then declined to 3% in 2015 before recovering to 6% levels in 2020.

Meanwhile, Uniform turns steadily declined from 3.9x in 2005 to 3.1x in 2008, before peaking at 5.3x in 2014. It then fell to 3.2x in 2020.

SUMMARY and ASUSTeK Computer Inc. Tearsheet

As the Uniform Accounting tearsheet for ASUSTeK Computer Inc. (2357:TAI) highlights, the Uniform P/E trades at 4.0x, which is below the global corporate average of 23.7x and around its own historical average of 3.1x.

Low P/Es require low EPS growth to sustain them. In the case of Asus, the company has recently shown a 104% Uniform EPS contraction.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Taiwan Financial Supervisory Commission: International Financial Reporting Standards (TIFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Asus’ sell-side analyst-driven forecast is a 64% EPS growth in 2021, and a 22% EPS shrinkage in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Asus’ TWD 392 stock price. These are often referred to as market embedded expectations.

Asus is currently being valued as if Uniform earnings were to shrink 21% annually over the next three years. What sell-side analysts expect for Asus’ earnings growth is above what the current stock market valuation requires in 2021 and around this requirement in 2022.

Furthermore, the company’s earning power is 3x above the long-run corporate average. Also, cash flows and cash on hand are 4x above its total obligations—including debt maturities, and capex maintenance. All in all, this signals a low credit and dividend risk.

To conclude, Asus’ Uniform earnings growth is in line with its peer averages. However, the company is trading below its average peer valuations.

About the Philippine Market Daily
“Wednesday Uniform Earnings Tearsheets – Asia-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one company listed in Asia that’s relevant to the Philippines and that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!

Regards,

Angelica Lim
Research Director
Philippine Markets Daily
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