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March 25, 2009 – Comments (3) | RELATED TICKERS: NTP , SAYCY.DL

Disclosure: I own shares of Nam Tai Electronics (NTE) in my personal account, and may buy more without notice.

I've been blogging about Nam Tai (NTE) recently, and with good reason. They're a historically well-run company in a tough industry in a sector that hasn't performed well yet this milennium, and they're trading below their balance sheet's cash minus debt (debt being near zero). Also, they're a historically good dividend payer who's suspended their dividend, which would be a yield of 25% on today's price.

So it's a gripping story of high potential, a possibly high reward to risk ratio. Doesn't the cash on the balance sheet provide a floor for the share price? No, apparently not. Doesn't it at least mean it can't go much lower? To be frank, I'm a young guy and I don't know, but I suspect it could go lower if the overall market gets killed again (a possibility I don't at all rule out).

Last time, in trying to find a reason for the share price of NTE to be so far below the company's net cash on hand, I looked to Satyam Computers (SAY). Satyam was a stock of infamy earlier this year when they revealed that they had lied about the cash on their balance sheet - $1 billion that never was, torn away from SAY's balance sheet. In these economic tough times, it was probably SAY shareholders' favorite $1 billion, too. Their share price crashed 80% and still hasn't gone up significantly since. That cash was important.

If Satyam was lying about its cash, what assurance do NTE investors have that Nam Tai isn't lying about theirs? They are also a foreign company, and probably have an "affordable" auditor auditing their books. It seems the market is pricing in a chance that they're lying about their cash. And if they are, the consequences would be even worse than for SAY, for whom their cash was a smaller part of their investors' thesis. (Though the integrity of the management was probably a big part of the investors' thesis.) Adding to this worry for me was the resignation of Nam Tai's CFO, the chief accountant. The man who would need to resign in shame if the cash on the balance sheet were imaginary. I sold almost all of my NTE shares when I read about this.

So, yeah, if your two ideas about NTE are cash and quality management, and it turns out they're lying about their cash, expect the stock to go to nickel and dime territory for a 90-99% capital loss.

But what are the odds? The CFO's resignation notiwthstanding, what are the odds that Nam Tai was making up the cash on their balance sheet? Yes, the example of Satyam is disturbing, but that very example makes it less likely, not more likely, that someone else would continue to get away with the same thing.

It's like asking someone: was airline travel safer on Sep. 10, 2001, or on Sep. 20, 2001? Airplane passengers were safer on Sep. 20. Did you feel safer on Sep. 20? No, you felt safer on Sep. 10. (Your privacy was respected a lot more, too, but that's another issue.)

So being made more aware of the risks makes us overestimate them, just as we had underestimated the risks all along, when we were blithely unaware.

Could NTE be lying and go down 90+%? It's a very real possibility. Is it likely enough to forego what looks like an easy double and a future dividend giant of Macao? No. 

Nam Tai Electronics is a buy at $3.50 (and higher).

3 Comments – Post Your Own

#1) On March 26, 2009 at 12:20 PM, FleaBagger (27.52) wrote:

I was a little late doubling (or tripling) down; I missed today's pop.

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#2) On March 27, 2009 at 1:48 AM, bigkansasfool (39.09) wrote:

If the books are cooked, it actually wouldn't be the first time for NTE.  You should google "Michael Rocco v. Nam Tai Electronics" because you'll learn about the accounting manipulation they admitted to in late 2002 and early 2003. 

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#3) On March 29, 2009 at 12:13 AM, FleaBagger (27.52) wrote:

Interesting, but I didn't see where they admitted to manipulation. Do you have a URL?

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